The mind’s hidden cost: epistemic akrasia and its impact on market efficiency

This study introduces epistemic akrasia – the state of holding beliefs that one judges epistemically unjustified – as an endogenous source of transaction costs. Traditional models assume rational belief updating, yet persistent market inefficiencies indicate deeper cognitive frictions. This study develops a formal model integrating epistemic akrasia into transaction cost economics, showing how internal misalignments between judgment and belief generate underinvestment in belief revision, epistemic externalities and low-trust equilibria. These inefficiencies persist even under perfect information, revealing that cognitive architecture imposes irreducible limits on efficiency. Thus, epistemic akrasia emerges not as a mere imperfection but as a rational adaptation to bounded cognition. Therefore, economic efficiency must be redefined as a second-order concept that explicitly includes cognitive constraints. Optimal institutional design cannot eliminate these frictions but must treat them as structural parameters of economic optimization, recognizing the ineliminable role of human epistemic limitations in shaping market coordination.