The Opportunity Cost Neglect of Money and Time : The Role of Mental Budgeting

• Main Authors: Fritzell, Gustav, Strand, Liam
• Format: Others
• Language: English
• Published: Linköpings universitet, Nationalekonomi 2018
• Subjects: Behavioral Economics; opportunity cost neglect; mental budgeting; time; Beteendeekonomi; försummelse av alternativkostnader; tid; Economics; Nationalekonomi
• Online Access: http://urn.kb.se/resolve?urn=urn:nbn:se:liu:diva-148668

Consumers often fail to consider the alternative ways to spend money when making decisions to buy consumer goods, this is called opportunity cost neglect. In this experimental study, our objective was to replicate the previous research of Frederick et al. (2009) showing that reminding individuals about the opportunity cost affects their decisions. Furthermore, we also wanted to extend the knowledge about this behavior by investigating whether individuals neglect the opportunity cost when making financial decisions or decisions about time allocation. In addition, we hypothesized that individuals who conduct mental budgeting (i.e., they categorize-, budget-, and track expenditures to mental accounts), are more likely to neglect the opportunity cost since they do not treat money as fungible. In an online experiment, we measured how being reminded about the opportunity cost would affect the probability of an individual buying a cheap and an expensive consumer goods, of investing money, and of watching a movie. Furthermore, we measured how being reminded about the opportunity cost affects the decision of those who conduct mental budgeting and those who do not. Our results showed that individuals neglect opportunity cost of the expensive consumer good and time (p=0.1). We found a positive relation between conducting mental budgeting and opportunity cost neglect for the expensive consumer good (p=0.1) and the deposit account (p=0.05), but no such effect in the other three scenarios. Our results imply that, due to opportunity cost neglect of time, people might be even further from optimal decision making than previously suggested since it extends to decisions about time allocation, and perhaps to investments; and people who conduct mental budgeting sometimes spend less/save more when reminded about the opportunity cost.