Discrete Adjustment to a Changing Environment: Experimental Evidence
Mel W. Khaw, Luminita Stevens, Michael Woodford , ( 91 )
Journal of Monetary Economics
88-103
November
2017
Abstract

A laboratory experiment illustrates cognitive limitations in decision-making that may be relevant for modeling price-setting. Our subjects systematically depart from the optimal Bayesian response in several respects. Their responses are random, even conditioning on available information. Subjects adjust in discrete jumps rather than after each new piece of information, and by both large and small amounts, contrary to the predictions of an "Ss" model of optimal adjustment subject to a fixed cost. And they prefer to report “round numbers,” even when that requires additional effort.

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