Sludge, transaction benefits, and cognitive institutions

Abstract

In behavioural economics, sludge is a novel umbrella term (introduced by Nobel laureate Richard Thaler) referring to the subjectively experienced excessive frictions in decision-making. Sludge researchers propose incorporating insights from institutional economics by linking sludge to subjective transaction costs that align with the subjectivist tradition in transaction cost theory. However, sludge research relies entirely on the i-frame: an individualistic and internalist (inside-the-brain) notion of decision-making. Although popular, the i-frame results in critical shortcomings and contradictions in sludge analysis. In contrast, I propose a systemic (s-frame) perspective for studying sludge. Along with a subjectivist view, sludge should be understood as an outcome of complex and evolving rule systems. Instead of focusing solely on the cost side of sludge, sludge analysis should be developed to include not only transaction costs but also transaction benefits that are unevenly distributed among heterogeneous actors. Furthermore, decision-making and sludge perception are not purely internal processes but socially extended cognitive processes governed by cognitive institutions and embedded in dynamic social interactions. Shifting the focus of sludge research toward the s-frame will allow us to understand sludge in all its institutional and socio-cognitive complexities.