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Opportunity Cost Consideration

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Generally , consumers should incorporate opportunity costs into every decision they make , yet behavioral researchers suggest that consumers should consider them rarely , if at all . In this paper I want tall about when consumers consider opportunity costs, who considers opportunity costs, which opportunity costs spontaneously spring to mind, and what the consequences of considering opportunity costs are. Perceived constraints cue consumers to consider opportunity costs, and consumers high in habit to plan consider opportunity costs even when not cued by immediate constraints. The specific alternatives recovered and the likelihood of recovery are functions of category structures in memory. For a given resource, some uses are more typical of the category of possible uses and so are more likely to be considered as opportunity costs. Consumers who consider opportunity costs are less likely to buy focal options than those who do not when opportunity costs are appealing , but no less likely when

opportunity costs are uninviting.

Key words: opportunity costs/ focal options/constraint/ outside options

1.What’s the opportunity cost ?

Opportunity cost is somebody in the face of the schemes and choose one decision, it is abandoned options of the highest value that is the decision-making opportunity cost. Opportunity cost is also called alternative cost. Opportunity cost to commercial company is that when they use proper time or resources to produce a commodity, and they lost the use of these resources to produce the perfect replacement for other opportunity .

In our life, some opportunity cost use the money to measure. For example, farmers get land, if he choose to feeding pigs ,he cannot choose to feeding chickens. The opportunity cost of feeding pigs is to give up the benefits of feeding chickens. But

some opportunity cost often can't use money to measure, for example, reading in the library or enjoy the drama.

And opportunity cost is the largest loss after that we make a choice. Opportunity cost changed when the cost changed. For example , when the foodness degree or value of the option which we discard changes, the value we get can do nothing to the opportunity cost.

And if we give up the highest value options (preferred) when we are in the choice, then the opportunity cost will be preferred. When we must make the choice, we should choose the best value options (the lowest opportunity cost option) and give up the highest opportunity cost options and it’s about the less you lose the wise you are.

Opportunity cost is usually include two parts:

1. The opportunity cost of using resources of others, that is the monetary cost we pay the owner of resources.We called it dominant costs.

2.The maximum rewards we get because of our giving up other possibilities. We also known it as the hidden costs.

Use the opportunity cost concept on the premise of economic analysis is:

1. resources are scarce

2.resources has a variety of uses

3. resources have been fully used

4. resources can free flow

Consumers have unlimited wants but there’s limited resources, so satisfying one want means not satisfying another and the opportunity cost come. An opportunity cost is“the evaluation placed on the most highly valued of the rejected alternatives or opportunities”or“the loss of other alternatives when one alternative is chosen”. Opportunity costs are fundamental to the science of economics and, normatively, consumers should account for opportunity costs in every decision. Though training can increase consideration, a stream of behavioral research concludes that individuals often ignore their opportunity costs. I define opportunity cost consideration as“considering alternative uses for one’s resources when deciding whether to

spend resources on a focal option.”

When do consumers consider opportunity costs? Who considers opportunity costs? Which opportunity costs do they consider? What are the consequences of considering versus neglecting opportunity costs? Now I will give you the answers about these questions.

2.When do consumers consider opportunity costs?

Consumers consider opportunity costs when they absorb immediate resource constraints and when they use limited-use resources (i.e., resources that may only be spent on particular products). Consumers who consider opportunity costs are more sensitive to their value than those who do not. Opportunity cost consideration will affects personal and societal well-being. Individuals who consider opportunity costs are more likely to obtain desirable life outcomes than those who neglect them.

3.Who considers opportunity costs?

4.Which opportunity costs do they consider?

5.What are the consequences of considering versus neglecting opportunity costs?

2.What effect the Opportunity Cost Consideration?

Consumers consider opportunity costs when they pay attention to outside options. Other structures may also bottle consumption, such as pain of paying or the value of the marginal dollar. But they are not the focus of the present work. This usage of opportunity cost consideration is consistent with previous research. Because the way consumers value money may be far from its possible uses, and therefore from opportunity costs. It is important to understand when they incorporate alternative resource uses, not just the value of money, into their decisions. Previous research has largely ignored the drivers of opportunity cost consideration, although some has focused on the consequences of opportunity cost

consideration versus neglect. Although framing one option as focal may not change the decision structure, and thus should not affect

the decision, it can have important effects on choice. Appealing focal options are more likely to be chosen than appealing outside options, more information is gathered about focal than outside

options, and sometimes purchase decisions are made as if outside options do not exist. Research on tentative testing similarly finds that more evidence is gathered about focal assumption than

alternative assumption, ending in over confidence regarding a focal assumption. Although focal options take on a privileged status, consumers sometimes spontaneously recruit outside options into focal decisions. The purpose of the present work is to determine what drives such spontaneous recruitment of outside options. I propose two critical drivers are perceived constraint and the accessibility of alternate resource uses.

The Effect of Perceived Constraint on Opportunity Cost Consideration

The first proposed driver of opportunity cost consideration is perceived constraint. When consumers recruit inputs to evaluate a single alternative, they rely on a metacognitive sense of sufficiency to drop search. I posit that the laws governing the consideration of alternatives that are not part of the focal decision are similar to the laws governing the retrieval of inputs to evaluate a single alternative. For example, as outside options become more relevant

to goal-based choices, they are more likely to be incorporated into consideration sets. Perceived constraint may increase the threshold for the sufficiency judgment, prompting consumers to ask themselves“What else should I consider?” and thereby increase opportunity cost consideration.

In support of this assumption, tight mental budgets can reduce consumption, and merely making smaller, more constrained accounts more accessible leads to alower likelihood of purchase speculate that consumers with tight budget constraints are more likely to construct cross-category consideration sets. Consumers tend not to consider alternatives that are not particularly available. But they are more likely to consider alternatives when they are more relevant, even if they are not focal. Thought agreements show that people analyse resource allocation tasks one decision at a time, effectively ignoring opportunity costs until they have few resources remaining. When they approach constraints, other payout opportunities are more diagnostic, and they construe the current decision as an allocation across multiple expenditure opportunities . Constraint is dynamic and vary over time; opportunity cost consideration should vary accordingly. Consumers using monthly budgets for any given purchase feel less constraint than consumers using weekly budgets, expenses are more salient

at the end of budgetary periods than at the beginning, and food consumption declines over the month for individuals receiving monthly food stamps. Collectively, these findings suggest that shorter budgeting periods may increase opportunity cost consideration.

The Effects of Category Structures on the Accessibility of Opportunity Costs in Memory

The second proposed driver of opportunity cost consideration is the accessibility of alternate resource uses. Information in memory often is available without being accessible, so increasing the accessibility of an alternative can increaseits consideration. Accessibility is a function of both self-generated and externally present retrieval cues. The present work examines three important ways in which accessibility influences opportunity cost consideration.

Chronic Accessibility. Just like other concepts in memory, opportunity costs may be only situationally accessible for some individuals but chronically accessible for others. Consumers with chronically accessible plans for the use of their money are likely to incorporate planned purchases into current decisions, much as listing ways one might spend $20 increases consideration of opportunity costs. Propensity to plan is a domain-specific, trait like

construct reflecting generation and consideration of future plans. Individual differences in propensity to plan reflect individual differences in frequency of plan formation, frequency and depth of subgoal planning, use of reminders and props to see the big picture, and preference to plan. Chronic planners are more likely than chronic nonplanners to consider opportunity costs(i.e., incorporate future resource uses into current decisions) when they are not constrained; when they are constrained, even nonplanners will consider them. In other words, chronic planning and constraint interact to affect opportunity cost consideration.

Nonplanners are less likely than planners to consider opportunity costs when they do not face immediate resource constraints, but nonplanners are as likely as planners to consider opportunity costs when they do face immediate resource constraints.

Resource constraints increase opportunity cost consideration for nonplanners, but resource constraints do not affect opportunity cost consideration for planners.

Resource-Use Typicality. Activation of a category concept (e.g., bird) makes its typical instances (robin or spar- row) more accessible than its atypical instances. Mental accounts and gift cards are associated with categories of purchases. Such

categories are ad hocor goal-derived categories that may include products from disparate product categories. For example, different sources of income are associated with different categories of possible expenditures, each of which includes resource uses that differ in typicality. I conjecture that considering a focal purchase with one of these resources will activate more typical resource uses more than less typical resource uses. As a result of their greater accessibility, they are more likely to be considered as alternatives to the focal option.

More typical uses of a resource are more likely to be considered as opportunity costs than less typical uses of a resource.

Resource-Use Limitations. Weber and Johnson (2006) argue that products do not readily come to mind when thinking of money because money is not associated with a meaningful category structure; it is tied to so many uses that it is not a good cue to any of those uses. Mental accounts are often organized around categories of purchases or sources of income and are types of categories themselves. Similarly, gift cards that are usable at different stores are limited in use to the categories of products available at those stores; these categories are usually not random collections but rather are often aligned with natural product categories .Any given

item in a narrow category is generally a more typical instance of that category than it is of a broader category, so narrow categories activate category instances more than broad categories.

Resources that are associated with

narrow categories of purchases activate alternative purchases, increasing the likelihood of consideration (Nedungadi 1990); such activation is less likely when categories are broad rather than narrow.

H4: Restricting the uses of a resource can increase consideration of opportunity costs while (weakly) decreasing the value of opportunity costs.

Consequences of Considering Opportunity Costs

Considering opportunity costs can, in general, reduce the likelihood of using a resource on some focal purchase. This can help rein in overspending, though sometimes it leads to underconsumption: when given a single free coupon, consumers may hold onto it too long because they wait for a better opportunity to use it (Shu 2008; see also Shu and Gneezy 2010). Considering opportunity costs changes the key decision input from the absolute value of the focal option to the value of the focal option relative to the opportunity cost that is retrieved. Compared to people who fail to consider

opportunity costs, those considering high-value opportunity costs will be less likely to purchase, whereas those considering low-value ones may not be (Frederick et al. 2009; Jones etal. 1998) or may even be more likely to purchase (Jones etal. 1998). The probability of making a purchase is inversely related to the value of the outside option only when that

outside option is considered. Relative to opportunity cost neglect, opportunity cost consideration should be associated with a decreased probability of purchase when it is more valuable than the focal option, but an increased probability of purchase when it is less valuable. This effect is counter to the perspective of economic models that assume that the utility of money is used as a standard for all purchases, as they do not contemplate contextual effects on the outside good.

H5: Opportunity cost consideration increases sensitivity to the value of outside options. In the remainder of the article, I provide evidence for these hypotheses in five studies. I begin by providing evidence for the role of constraint (studies 1, 2, and 3), emphasizing the role of pay cycle (studies 1 and 2) and constraint’s interaction with dispositional planning (studies 2 and 3). Finally, I discuss the role of resource-use limitations and accessibility (studies 4 and 5). Table 1 summarizes the hypotheses and

specifies the study in which each is tested.

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“Opportunity Cost,

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