Stranding Ahoy? Heterogeneous Transition Beliefs and Capital Investment Choices

We study how conflicting beliefs on future transition dynamics interact with short- termist preferences in shaping investment decisions. We develop a simple model where firms choose between two technological options (high- and low-carbon) based on their expected profitability over a finite planning horizon. Profit expectations depend on beliefs about the speed of the transition and associated high-carbon capital stranding. Firms’ expectations are distributed around a central stranding projection, representing a dominant narrative, or ‘market norm’, with their dispersion increasing non-linearly over the planning horizon. We provide analytical and simulation-based insights on how belief dispersion affects investment decisions and interacts with agents’ farsightedness. We show that ambitious central expectations can temper the effect of belief heterogeneity and that the sensitivity of investment allocations to changes in belief dis- persion depends significantly on the central expectation. Belief heterogeneity and the discount rate can have conflicting effects. Finally, increasing agents’ farsightedness does not necessarily lead to more low-carbon investment in a situation of high heterogeneity