Belief Disagreement and Portfolio Choice

Using a proprietary dataset of the portfolio holdings of millions of US households, we document how agents who believe in different models of the world update their beliefs heterogeneously in response to a public signal. We identify households ex ante that hold different models of the world using political party affiliation (probabilistically inferred from zip code), and our public signal is the unexpected outcome of the US national election of 2016. Relative to Democrats, Republican investors actively increase the equity share and market beta of their portfolios following the election. The rebalancing is due to a small share of investors making large adjustments. We conclude that this behavior is driven by belief heterogeneity because of extensive controls for differential hedging needs or preferences, including detailed controls for age, wealth, income, state, and even county-employer fixed effects.