The Power of a Nudge Toward Thrift

In ideal economic models, consumers weigh every purchase against a hypothetical alternative for that money — the opportunity cost. But a paper forthcoming in The Journal of Consumer Research argues that people generally neglect opportunity cost unless they are prompted to consider it.

In a range of studies, consumers preferred the cheaper option in greater numbers when the price difference was made explicit — when price difference was specified as residual cash, and when other uses of the money were suggested — thus generating an opportunity cost in their minds. Consumers classified as frugal are evidently more predisposed than spendthrifts to calculate opportunity costs without cues.

“Sellers of expensive goods should trivialize opportunity costs,” whereas marketers of cheap goods should suggest options for leftover cash, said Nathan Novemsky, an associate professor of marketing at the Yale School of Management who is one of the paper’s authors.

The researchers also say that neglect of opportunity cost plays a significant role outside of products. They contrast the 2002 State of the Union speech by President George W. Bush maintaining that the defense budget “is never too high” with a 1953 speech by President Dwight D. Eisenhower comparing the cost of a bomber plane with numerous foreclosed civic projects.