CHAPEL HILL, N.C. — Investors don’t shed their political biases when they start buying and selling stocks.
The investment consequences of political bias are particularly evident in how willing we are to incur risk in the stock market. One way researchers have documented this is what we do to our portfolios in the wake of a change in the political affiliation of the presidency. If your preferred candidate wins, chances are good that you will believe the economy’s prospects have improved and risk has lessened, and as a consequence you will increase your equity exposure.
By the way, don’t think that it’s just naive and uneducated individual investors who find objectivity so hard to come by. A recent study in the Journal of Banking and Finance found that hedge-fund managers—presumably the best and brightest the financial world has to offer—are also guilty of the same thing. The study, “Hedge Fund Politics and Portfolios,” was conducted by two finance professors: Luke DeVault of Clemson University and Richard Sias of the University of Arizona.
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