Between non-best response and limited reasoning – Experimental evidence on inertia using process data

• Applicant: Professor Dr. Johann Graf Lambsdorff
• Subject Area: Economic Theory
• Term: since 2025
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 566399671

The project investigates the phenomenon of inertia in economic decision-making, where agents such as consumers, firms, or governments adjust their actions gradually rather than immediately in response to new economic conditions. Traditional macroeconomic theories attribute this inertia to rigidities like price adjustment costs and sticky information flows. However, experimental evidence reveals substantial limits to the rationality assumed in these models, resulting in non-optimal responses and low levels of expectation formation among participants. This project hypothesizes that these gaps between theory and experimental evidence can be explained by limited cognitive capacities, which hinder the ability of agents to fully process complex tasks, form higher-order beliefs, and make optimal decisions. The experimental design includes a symmetric price-setting game with strategic complementarity, varying task complexity, and information completeness across different treatments. Participants will engage in tasks with either simple or complex conditions to observe how cognitive load impacts their ability to form higher-order beliefs and best respond to changing economic conditions. By collecting and analyzing process data at multiple points during the experiment, the study aims to distinguish whether cognitive limitations primarily cause non-best responses or low levels of reasoning (lower-order beliefs). Artificial intelligence will be used to evaluate participants' written explanations, ensuring an unbiased assessment and incentivizing detailed explanations. The project's goals are to identify the cognitive limitations that lead to inertia, bridge the gap between macroeconomic theory and experimental evidence, and provide insights for more effective communication of monetary policy. By understanding the cognitive processes behind economic decision-making, the study aims to improve theoretical models and inform policy-making. The findings could help central banks design communication strategies that account for the cognitive constraints of economic agents, potentially leading to more effective policy interventions and a better understanding of the heterogeneous reactions to aggregate shocks or policy measures. This research not only aims for high-impact academic publications but also seeks to offer practical implications for enhancing the effectiveness of economic policies.

• DFG Programme: Research Grants