The concept of opportunity cost can be seen in the emergent societal dilemma presented by Rebecca Black through her insightful lyrics:

“Kickin’ in the front seat
Sittin’ in the back seat
Gotta make my mind up
Which seat can I take?”

As we can see, Rebecca must choose between kicking in the front seat and sitting in the back seat – two mutually exclusive options where her choice of either eliminates the opportunity to choose the other.

The same evaluation of opportunity cost can be seen in monetary exchanges that we make every day. In my dissertation work, I’ve focused on when consumers are more or less likely to reframe purchase decisions (like “Do I buy Rebecca Black’s ‘Friday’ or not?”) as allocation decisions (like “Do I buy Rebecca Black’s ‘Friday,’ or do I spend my money on something else instead?”).

Two important drivers are:
1) how constrained consumers feel
2) how much their resources bring other purchases to mind

First, I find that when consumers face more constraints, they are more likely to incorporate other purchases into their decisions. This constraint can be driven by cash on hand, annual income, or even the cycle on which you are paid. People paid weekly face less constraints on average (at least until the end of the month) than those paid monthly. As a result, those paid monthly are more likely to think “Do I buy this CD or not?” whereas those paid weekly are more likely to think “Do I buy this CD or do I spend my money on something else instead?”

Second, consumers can actually be more likely to fixate on their opportunity costs when they use resources with specific associations. Think about spending a Starbucks gift card versus a Visa gift card to buy Rebecca Black’s CD (imagining that it could be on the eclectic menu of CDs at Starbucks). The Starbucks gift card immediately makes you think about the coffee you could buy, so the decision changes from “Do I buy the CD or not?” to “Do I buy the CD or coffee?” The Visa gift card could be used to buy nearly anything but it doesn’t make you think about something else in particular, so the decision remains “Do I buy the CD or not?” What does this mean in practice? Starbucks coffee lovers are actually more likely to spend the Visa gift card than the Starbucks gift card even though the Visa gift card could be used to buy anything – including a Starbucks gift card!

Here at the Center for Advanced Hindsight, we see these factors at play constantly — and not just when spending money. At the beginning of the day, I have plenty of time (or convince myself of that at least), so the decision to write a blog post is “Do I write it or not?” but at the end of the day, the decision is “Do I write it now, or do I work on my paper, or do I watch the ‘Friday’ video, or do I go to sleep?” Some times of day have specific associations, so at 10:00am, the question may be “Do I write the blog post or not?” whereas as at 12:00pm, the question is “Do I write the blog post or do I eat lunch?” Take a guess when I finally got around to writing this… But our discussion of procrastination will have to wait for another day.

For more details, see “Opportunity Cost Consideration,” forthcoming in the December 2011 issue of the Journal of Consumer Research.

~Stephen Spiller~