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Belief Polarization and Investment

We study a canonical real option model where the decisions to acquire and subsequently abandon an asset are made sequentially by a group of agents with heterogeneous beliefs. Casting the decisions as a voting game, we show that inefficient underinvestment can occur when the group mediates disagreement through majority rule: Although each group member would acquire the option if they had post-acquisition control rights, the group votes against acquisition. We show that this inefficiency occurs when group members’ beliefs are polarized in that they form two opposing factions with sufficiently large differences in beliefs. Given the pervasive nature of group decisions in the life of organizations and institutions, our theory is particularly relevant for the behavior of venture capitalists, financing syndicates, corporate boards, and committees at large.