Belief Polarization and Investment

41 Pages Posted: 15 Mar 2019

See all articles by Lorenzo Garlappi

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business

Ron Giammarino

University of British Columbia (UBC) - Sauder School of Business

Ali Lazrak

University of British Columbia (UBC) - Sauder School of Business

Date Written: February 15, 2019

Abstract

We study a canonical real option model where the decisions to acquire and abandon an option are made sequentially by a group of agents with heterogeneous beliefs. Applying results from the political economy literature on spatial voting, we show that when the group mediates disagreement through voting, inefficient underinvestment can occur: although each group member would acquire the option if he had post-acquisition control rights, the group votes against acquisition. We show that this inefficiency occurs when group members' beliefs are polarized, that is, divided into two opposing factions of equal size. 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.

Keywords: group decisions, dynamic voting, real investment

Suggested Citation

Garlappi, Lorenzo and Giammarino, Ronald and Lazrak, Ali, Belief Polarization and Investment (February 15, 2019). Available at SSRN: https://ssrn.com/abstract=3341017 or http://dx.doi.org/10.2139/ssrn.3341017

Lorenzo Garlappi

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Ronald Giammarino (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver BC V6T 1Z2
Canada
604-822-8357 (Phone)
604-822-4695 (Fax)

Ali Lazrak

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

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