The concept of opportunity cost is not foreign to most people who have taken an introductory economics class at some point, nor is it terribly complex to grasp if you don’t have that background. Basically, it is the value attributed to the next best thing that has been foregone in favor of something else. Many economic models take this principle into account when they are interpreted to describe consumer behavior. However, when it comes to application in the real world, Frederick et al. (2009) argue that this assumption that consumers evaluate their opportunity cost at every turn does not hold true a majority of the time. In their paper, this phenomenon is referred to as “opportunity cost neglect.”
A general example: I walk into Target looking to buy a new set of tupperware containers. I then make my way over to the food storage section and see that there’s a set on sale for seven dollars. I think, “Oh yeah! This is a great discount and I definitely need these containers!” When I decide to buy the containers without considering the fact that those seven dollars could have been used to purchase something else (e.g. next month’s Hulu subscription), I become negligent of my opportunity cost.
Frederick et al. (2009) argue that part of this issue lies in the fact that consumers typically focus only on the explicitly given information (such as sticker price) and don’t take the time to follow the implicit framework for determining opportunity cost. In essence, they found that people do not typically consider alternatives that aren’t explicitly provided.
One of the studies they conducted laid out the following scenario:
Imagine that you have been saving some extra money on the side to make some purchases, and on your most recent visit to the video store you come across a special sale on a new video. This video is one with your favorite actor or actress, and your favorite type of movie (such as as comedy, drama, thriller, etc.). This particular video that you are considering is one you have been thinking about buying a long time. It is available at a special sale price of $14.99.
What would you do in this situation?
The two different wordings in answer B) are the point of emphasis in this part of their research. They found that when the option used the wording “not buy,” willingness to purchase among their subjects was 75%. When that wording was changed to “keep the $14.99 for other purchases,” willingness to purchase dropped to 55%. Thus, when the option to use the money for an alternative was explicitly presented to the subjects they were more considerate of the opportunity cost of purchasing the video. (The study also found similar results with other goods, so this trend seems to hold for more than just purchasing of a video.)
At this point you may be wondering why I have rambled on for such an obscenely long time about opportunity cost neglect. The simple answer is this: I think it’s a concept that is skimmed over when considering the application of economic models and consumer behavior (though I will admit I don’t have a huge repertoire of economics knowledge at this time and this is only a small portion of research). But, the next time that you go into a store to purchase something that you want (but may not really need, or may be able to do without), consider thinking through the alternative ways that your money could be spent. Opportunity cost neglect is just another facet of consumerism that has become extremely ingrained in society but is remains relatively easy to evaluate in your own life.
Read the full paper here: http://faculty.som.yale.edu/ravidhar/documents/OpportunityCostNeglect.pdf