Professor Michael Weber will present the paper ''Beliefs and Portfolios: Causal Evidence''
We causally test alternative theories of expectation formation and asset pricing. Using a randomized information experiment we show: i) individuals form pro-cyclical beliefs, both about returns and earnings growth and don’t respond to information about the aggregate price-earnings ratio; ii) individuals overreact to earnings growth and return news relative to the historical associations in the data; iii) individuals are heterogeneous both at the information acquisition and information processing stage. Their reaction to stock market news depends on their information preference; iv) beliefs and portfolio decisions are causally linked; conditional on their subjective beliefs, individuals’ choices are consistent with the standard Merton model of portfolio choice. These results inform and guide the development of novel macro-finance models.