Content uploaded by Shane Frederick
Author content
All content in this area was uploaded by Shane Frederick
Content may be subject to copyright.
A preview of the PDF is not available
Opportunity Cost Neglect
Abstract
To properly consider the opportunity costs of a purchase, consumers must actively generate the alternatives that it would displace. The current research suggests that consumers often fail to do so. Even under conditions promoting cognitive effort, various cues to consider opportunity costs reduce purchase rates and increase the choice share of more affordable options. Sensitivity to such cues varies with chronic dispositional differences in spending attitudes. We discuss the implications of these results for the marketing strategies of economy and premium brands. (c) 2009 by JOURNAL OF CONSUMER RESEARCH, Inc..
... In total, 39 experimental studies were included in the meta-analysis (N = 14,005). The analysis shows a robust significant effect (Cohen's d = 0.22; p < 0.001) of opportunity cost neglect across different domains, albeit the effect is considerably smaller than what was originally estimated by Frederick et al. (2009). Our findings highlight the importance of meta-analyses and replications of initial findings. ...
... In the prototypical task introduced by Frederick et al., (2009, Study 1), the proportion of participants who stated a willingness to purchase a special-priced DVD for $14.99 declined from 75 to 55% when people were reminded about the opportunity cost, i.e., that not buying the DVD implied that the $14.99 could be used for other purchases. The study by Frederick et al. (2009) was the first to show the effect of opportunity cost neglect in a behavioural experiment, and that the magnitude of the bias was substantial. Simply reminding people that money could have alternative usage decreased their willingness to purchase consumer products by almost 50% (from 73 to 37% in Study 2). ...
... Simply reminding people that money could have alternative usage decreased their willingness to purchase consumer products by almost 50% (from 73 to 37% in Study 2). Following Frederick et al. (2009) several studies have used similar experimental paradigms to explore the existence of opportunity cost neglect in different decision-making domains, such as public policy (see Aharoni et al., 2018Aharoni et al., , 2020 for an application in criminal punishment recommendations and Persson & Tinghög, 2020a, 2020b for the health domain), in charitable giving (Moche et al., 2020), intertemporal choice (Read et al., 2017;Spiller, 2019) and consumer choice (Greenberg & Spiller, 2016;Moche et al., 2020;Plantinga et al., 2018;Read et al., 2017;Spiller, 2019;Weiss & Kivetz, 2019;Zhang et al., 2017). Nonetheless, arguments have been put forward that opportunity costs might be overestimated, rather than neglected, when making choices under external constraints (Weiss & Kivetz, 2019). ...
In a seminal paper, Frederick et al. (J Consum Res 36:553-561, 2009) showed that people's willingness to purchase a consumer good declined dramatically when opportunity costs were made more salient (Cohen's d = 0.45-0.85). This finding suggests that people normally do not pay sufficient attention to opportunity costs and as a result make poorer and less efficient decisions, both in private and public domains. To critically assess the strength of opportunity cost neglect, we carried out a systematic review and a meta-analysis including published and non-published experimental work. In total, 39 experimental studies were included in the meta-analysis (N = 14,005). The analysis shows a robust significant effect (Cohen's d = 0.22; p < 0.001) of opportunity cost neglect across different domains, albeit the effect is considerably smaller than what was originally estimated by Frederick et al. (2009). Our findings highlight the importance of meta-analyses and replications of initial findings.
... Normatively, decisions require the consideration of opportunity costs (Alchian, 1968;Buchanan, 1978), which can be defined as "considering alternative uses for one's resources when deciding whether to spend resources on a focal option" (Spiller, 2011, p. 595). Tightwads (Frederick et al., 2009), those who are high in propensity to plan or have a future-orientation (Wu & He, 2012) consider opportunity costs on their own. Spiller (2011) also showed that financially constrained individuals spontaneously considered their opportunity costs. ...
... Other research suggests that people can neglect their opportunity costs (Frederick et al., 2009;Jones et al., 1998;Legrenzi et al., 1993;Magen et al., 2008;Northcraft & Neale, 1986). For example, Frederick et al. (2009) asked participants whether they would buy a desirable video that they have been thinking about buying a long time for $14.99. ...
... Other research suggests that people can neglect their opportunity costs (Frederick et al., 2009;Jones et al., 1998;Legrenzi et al., 1993;Magen et al., 2008;Northcraft & Neale, 1986). For example, Frederick et al. (2009) asked participants whether they would buy a desirable video that they have been thinking about buying a long time for $14.99. The decision to not buy it was varied such that "not buy this entertaining video" option in the implicit opportunity costs condition was accompanied by "keep the $14.99 for other purchases" in the explicit opportunity costs condition. ...
Sampling provides limited experience with an offering to promote its purchase, either now or later. Sampling involves an ongoing choice about whether to buy the sampled option. We propose that ongoing choice feels more like a choice when people consider opportunity costs. Consequently, we predict that opportunity cost consideration will accentuate the impact of ongoing choosing on enjoyment over time of the sampled option (i.e., a slope effect). It follows that when ongoing decision evolves toward not choosing the sampled option today, its negative impact on enjoyment should become more pronounced when people consider their opportunity costs, decreasing overall enjoyment. Studies 1, 2, and 3 provided support for this key prediction. Studies 4 and 5 showed that when the best alternative use of a resource people considered was more attractive, they experienced accelerated satiation from an unchosen sampled option. While previous research showed that opportunity cost consideration accentuated the impact of one‐time choice on evaluation (i.e., intercept effect), we showed that it accentuated the impact of ongoing choice on enjoyment over time (i.e., slope effect). We also contribute to the understanding of the factors that increase overall enjoyment of a sampling experience, which should influence future purchase likelihood.
... Our findings also contribute to the literature on the antecedents of opportunity cost consideration. While this literature has primarily focused on the impact of dispositional differences in spending attitudes, such as being a tightwad 65 and ...
... Experimental studies have shown that opportunity costs can be brought to mind by directing people's attention to alternative uses of money beyond the options at hand, 50 even outside the purchase context. 65 However, the heightened consideration of opportunity cost encourages people to choose products that are less expensive, and thus less durable and less environmentally friendly. 50 This consumer behavior can have a negative impact on consumption utility. ...
Background:
Recently, the importance of individual differences has been recognized in the literature of general life satisfaction and domain-specific satisfaction, however, empirical research exploring the relationship between individual differences in self-regulatory focus and financial satisfaction remains relatively sparse, and less is known about the underlying processes that may mediate this relationship. The current study addressed these gaps by investigating whether and how self-regulatory focus (promotion vs prevention) as a motivational trait is related to college students' financial satisfaction. A model was tested in which this association was sequentially mediated by the effects of construal level and opportunity cost consideration.
Methods:
A total of 552 college students (38.6% male; ages 19-25) completed a packet of questionnaires that measured trait regulatory focus, construal level, opportunity cost consideration, and financial satisfaction.
Results:
The mediation model was tested via multiple regression analyses and bootstrapping procedure. The results supported a sequential mediation model, suggesting that predominantly promotion-focused regulation is associated with information construal at a more abstract level, increasing the consideration of opportunity costs, and subsequently enhancing financial satisfaction.
Discussion:
These findings can broaden our understanding of how trait regulatory focus potentially influences financial satisfaction, offering new directions towards improving college students' financial satisfaction.
... The Final Price Neglect Hypothesis in Non-Integrated Multi-Product Promotions Consumers have constraints in working memory and cognitive capacity (Johnson 2008) and therefore often process complex information insufficiently, especially when relevant information is not directly available (Frederick et al. 2009;Sela and LeBoeuf 2017). Such insufficient processing is particularly common for numerical information presented in a complex format, which further increases the cognitive challenge and effort required in information processing (Bagchi and Davis 2012;Berman et al. 2016;Chen et al. 2012;Chen and Rao 2007;Cheng and Cryder 2018;Davis and Bagchi 2018;Sevilla, Isaac, and Bagchi 2018;Thomas and Morwitz 2009). ...
... First, insufficient processing is more likely to occur when the information is not readily available. For instance, when outside options are not made salient, consumers tend to neglect the opportunity costs of their actions (Frederick et al. 2009); when the basic default option is not made salient, consumers are more inclined to make an upgrade decision (Sela and LeBoeuf 2017). Second, when numerical information has a complex form, consumers tend to rely on simplified yet inaccurate rules for computation (Chen et al. 2012;Chen and Rao 2007;Davis and Bagchi 2018). ...
Price reductions take either an integrated form (e.g., a discount shown directly on the price tag) or a non-integrated form (e.g., a discount contained in a coupon sent to consumers and thus separate from the price tag). This research examines how non-integrated versus integrated promotions influence choices among vertically differentiated products. Under an integrated promotion (e.g., $10 off) applicable to multiple products (e.g., original list prices: $50 vs. $30), consumers directly compare these products’ post-promotion final prices displayed on their price tags (after a reduction of $10: $40 vs. $20). In contrast, under a non-integrated promotion of the same monetary value, consumers simply compare these products’ original list prices ($50 vs. $30) and neglect their post-promotion final prices, which require calculations. The list prices ($50 vs. $30; relative to the final prices: $40 vs. $20) as a basis for price comparison reduce the perceived price difference between these products. Consequently, a non-integrated promotion (compared to an integrated promotion) increases consumers’ choice of higher-priced products. A series of experiments (N = 5,187) demonstrate this effect and support the final price neglect mechanism. Furthermore, although attenuated, this effect still emerges for price reductions of a smaller magnitude or in a percent-off format.
... Currently, available information corresponds to information that fulfills consumer needs, while additional information refers to information beyond consumer needs (i.e., supplementary information). Based on our conceptualization, when informed consumers transition from online search to offline evaluation, they focus their attention on a limited number of target-related and determinant attributes (Büttner et al., 2014;Chung et al., 2022) and base their decisions on salient current information (Frederick et al., 2009;Kahneman & Frederick, 2002;Slovic, 1972). Therefore, the type of information provided by a salesperson influences consumers' responses. ...
Retailers hire salespeople in physical stores to boost revenue by influencing consumer decision‐making. However, the Internet provides consumers with a variety of online product information before they enter the physical store, and this rich online information reduces their willingness to interact with offline salespeople. Using regulatory focus theory, we explore why well‐informed consumers avoid sales interactions and explore strategies for salespeople to mitigate this negative effect. Across three studies, we show that high consumer informedness induces a heightened prevention focus that causes consumers to avoid sales interactions to control the decision‐making process by themselves (Studies 1 and 2). This effect can be alleviated when salespeople provide consumers with currently available information rather than additional information (Study 3). This research contributes to the literature on consumer informedness, regulatory focus theory, and research on promotional information types and provides guidance for retailers' sales interactions.
... By default, we propose that a waste-avoidance goal is likely to be viewed as graded. This is because consumers usually are not good forward planners (Cripps & Meyer, 1994) and, as an example, often neglect opportunity costs (Frederick et al., 2009;Spiller, 2011), which leads to a tendency to overbuy when presented with small sales or discounts (Fernbach et al., 2015;Thaler, 1980). Furthermore, while making a purchase, consumers typically do not consider precisely how often (Friedman & Dhar, 2019;Goodman & Irmak, 2013;Mittelman et al., 2020) or for how long (Sun et al., 2021) they plan use their durable products. ...
Consumers often buy products that they later do not use. How does failing to use purchased products affect subsequent spending? Six experiments demonstrate that when consumers do not use their purchased products, it decreases their subsequent discretionary spending across product categories due to an aversion to wasted money. We find that this effect is driven primarily by perceived money waste and not product waste. Consequently, the effect persists even when consumers avoid product waste, such as by donating their unused products, but is mitigated when they avoid money waste, such as when their unused products are freely acquired. We also find that failing to use products decreases discretionary spending only when consumers perceive the failure as a temporary setback on their goal to avoid waste but not as an unredeemable goal failure. Moreover, the effect is unique to perceived waste and does not generalize to other forms of financial mismanagement, such as excess spending beyond one's budget. Overall, our research builds a psychological understanding of how consumers think about unused utility and when and why it leads to a future reduction in consumption and spending.
Starting a business requires investing both money and time in the hope of future financial benefits. Because investments and potential gains happen over time, the way in which individuals value the future relative to the present—that is, their temporal preferences—may be an important driver behind the decision to become an entrepreneur. Whereas existing research examines temporal preferences for financial gains, we advance this research by theorizing about temporal preferences not only for money, but also for the future time commitments that entrepreneurship entails. Results from a laboratory-in-the-field study show that individuals who heavily discount future time investments are more likely to become entrepreneurs. In two follow-up studies, we confirm that recent start-up founders discount future time investments more than salaried workers. We also provide suggestive evidence of the mechanisms at play: recent start-up founders perceive the future differently than salaried workers, both viewing themselves as more agentic vis-à-vis the future and perceiving the future as more distant. We discuss the implications of temporal preferences—not only for money, but also for time—for understanding the behavioral drivers of entrepreneurship.
Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2023.1681 .
When deciding how long to keep waiting for delayed rewards that will arrive at an uncertain time, different distributions of possible reward times dictate different optimal strategies for maximizing reward. When reward timing distributions are heavy-tailed (e.g., waiting on hold) there is a point at which waiting is no longer advantageous because the opportunity cost of waiting is too high. Alternatively, when reward timing distributions have more predictable timing (e.g., uniform), it is advantageous to wait as long as necessary for the reward. Although people learn to approximate optimal strategies, little is known about how this learning occurs. One possibility is that people learn a general cognitive representation of the probability distribution that governs reward timing and then infer a strategy from that model of the environment. Another possibility is that they learn an action policy in a way that depends more narrowly on direct task experience, such that general knowledge of the reward timing distribution is insufficient for expressing the optimal strategy. Here, in a series of studies in which participants decided how long to persist for delayed rewards before quitting, we provided participants with information about the reward timing distribution in several ways. Whether the information was provided through counterfactual feedback (Study 1), previous exposure (Studies 2a and 2b), or description (Studies 3a and 3b), it did not obviate the need for direct, feedback-driven learning in a decision context. Therefore, learning when to quit waiting for delayed rewards might depend on task-specific experience, not solely on probabilistic reasoning.
Is consumers' present spending influenced by future changes in their income? From an economic perspective, consumers should reduce present spending when anticipating a future income decrease and boost spending when anticipating a future income increase to maximize their welfare. We find that although consumers tend to adjust their spending to a future income decrease, they are less likely to do so to a future income increase. We show that this is, in part, due to a low sense of self‐continuity, a tendency to view the future self whose income increases as if it were a different person and, as a result, to categorize present and future income into two separate mental accounts. Enhancing self‐continuity leads consumers to combine present and future income in a single mental account, and thereby facilitates adjustment of present spending to a future income increase. Whereas prior work linked high self‐continuity to reduced present spending, we identify a context in which high self‐continuity can boost present spending. We discuss the implications of these findings for consumer well‐being.
Only one in seven of the world's population have ever migrated, despite the enormous gains in income possible through international and internal movement. I examine the evidence for different explanations given in the economics literature for this lack of movement and their implications for policy. Incorrect information about the gains to migrating, liquidity constraints that prevent poor people paying the costs of moving, and high costs of movement arising from both physical transportation costs and policy barriers all inhibit movement and offer scope for policy efforts to inform, provide credit, and lower moving costs. However, the economics literature has paid less attention to the fears people have when faced with the uncertainty of moving to a new place, and to the reasons behind the tears they shed when moving. While these tears reveal the attachment people have to particular places, this attachment is not fixed, but itself changes with migration experiences. Psychological factors such as a bias toward the status quo and the inability to picture what one is giving up by not migrating can result in people not moving, even when they would benefit from movement and are not constrained by finances or policy barriers from doing so. This suggests new avenues for policy interventions that can help individuals better visualize the opportunity costs of not moving, alleviate their uncertainties, and help shift their default behavior from not migrating.
Consumers often behave differently than they would ideally like to behave. We propose that an anticipatory pain of paying drives “tightwads” to spend less than they would ideally like to spend. “Spendthrifts,” by contrast, experience too little pain of paying and typically spend more than they would ideally like to spend. This article introduces and validates the “spendthrift-tightwad” scale, a measure of individual differences in the pain of paying. Spending differences between tightwads and spendthrifts are greatest in situations that amplify the pain of paying and smallest in situations that diminish the pain of paying.
Fault trees represent problem situations by organizing "things that could go wrong" into functional categories. Such trees are essential devices for analyzing and evaluating the fallibility of complex systems. They follow many different formats, sometimes by design, other times inadvertently. The present study examined the effects of varying 3 aspects of fault tree structure on the evaluation of a fault tree for the event "a car fails to start." The fault trees studied had 4 to 8 branches, including "battery charge insufficient," "fuel system defective," and "all other problems." Six experiments were conducted, 5 of which used a total of 628 college community members and 1 of which used 29 experienced auto mechanics. Results show the following: (a) Ss were quite insensitive to what had been left out of a fault tree. (b) Increasing the amount of detail for the tree as a whole or just for some of its branches produced small effects on perceptions. (c) The perceived importance of a particular branch was increased by presenting it in pieces (i.e., as 2 separate component branches). Insensitivity to omissions was found with both college Ss and mechanics. It is suggested that, aside from their relevance for the study of problem solving, results have implications for (a) how best to inform the public about technological risks and to involve it in policy decisions and (b) how experts should perform fault tree analyses of the risks from technological systems. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Presents a new theory of subjective probability according to which different descriptions of the same event can give rise to different judgments. The experimental evidence confirms the major predictions of the theory. First, judged probability increases by unpacking the focal hypothesis and decreases by unpacking the alternative hypothesis. Second, judged probabilities are complementary in the binary case and subadditive in the general case, contrary to both classical and revisionist models of belief. Third, subadditivity is more pronounced for probability judgments than for frequency judgments and is enhanced by compatible evidence. The theory provides a unified treatment of a wide range of empirical findings. It is extended to ordinal judgments and to the assessment of upper and lower probabilities. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Existing models of intertemporal choice normally assume that people are impatient, preferring valuable outcomes sooner rather than later, and that preferences satisfy the formal condition of independence, or separability, which states that the value of a sequence of outcomes equals the sum of the values of its component parts. The authors present empirical results that show both of these assumptions to be false when choices are framed as being explicitly defined sequences of outcomes. Without a proper sequential context, people may discount isolated outcomes in the conventional manner, but when the sequence context is highlighted, they claim to prefer utility levels that improve over time. The observed violations of additive separability follow, at least in part, from a desire to spread good outcomes evenly over time. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
We find systematic differences in the way that people spend time versus money. Ex post, people are able to more easily accommodate negative outcomes by adjusting the value of their temporal inputs. Ex ante, people are willing to spend more time for higher risk, higher return options whereas when spending money the pattern is reversed and the more standard pattern of increasing risk aversion is observed. Although accurate assessment of the opportunity costs of time is key to making good decisions, ambiguity in the value of time promotes accommodation and rationalization.
Large samples of students in the Midwest and in Southern California rated satisfaction with life overall as well as with various aspects of life, for either themselves or someone similar to themselves in one of the two regions. Self-reported overall life satisfaction was the same in both regions, but participants who rated a similar other expected Californians to be more satisfied than Midwesterners. Climate-related aspects were rated as more important for someone living in another region than for someone in one's own region. Mediation analyses showed that satisfaction with climate and with cultural opportunities accounted for the higher overall life satisfaction predicted for Californians. Judgments of life satisfaction in a different location are susceptible to a focusing illusion: Easily observed and distinctive differences between locations are given more weight in such judgments than they will have in reality.
Many decisions can be framed either as ‘choices’ between alternative courses of action (e.g. Should I move to New York or stay in Chicago?) or as ‘opportunities’ to pursue a particular course of action (i.e. Should I move to New York?). Although there is no logical difference between these two different decision frames, there may be important psychological differences between them. In four studies, we explore the differences between ‘choices’ and ‘opportunities’. The results of Studies 1 and 2 show that college students view many of the decisions they typically face as opportunities, rather than choices. Further, the results of Study 2 suggest that the frame students adopt is systematically related to the preferences they express. The latter finding led to Studies 3 and 4, where we show that preferences can be influenced by encouraging people to adopt one decision frame rather than another. © 1998 John Wiley & Sons, Ltd.