In economic theory (aka never never land), rational consumers weigh every purchase against alternative uses for that money, its opportunity cost. Money not being an infinite resource for most of us, every choice and every expenditure forecloses other choices, eliminating the possibility of other purchases.
However, as reported in The New York Times, an article in the Journal of Consumer Research suggests that real live human beings rarely consider opportunity costs unless prompted to do so. In significant numbers, more consumers selected the more-economical alternative when prompted to consider the difference explicitly in terms of residual cash or other uses for the money. In other words, most consumers only considered opportunity costs when nudged. Consumers categorized as “frugal” evidently consider opportunity costs without cues.
Studies show that 37% of consumers preferred a 16-gigabyte iPod for $299 over a 32-gigabyte iPod for $399. When explicitly reminded that they would have $100 to spend elsewhere (the opportunity cost), 73% surveyed preferred the 16-gigabyte iPod for $299 over the 32-gigabyte iPod for $399.
“Sellers of expensive goods should trivialize opportunity costs,” while purveyors of more economical goods should suggest alternatives for the leftover cash.
Neglect of opportunity costs occurs in other arenas as well, including politics. President George W. Bush, in his 2002 State of the Union address, claimed that the cost of the defense budget could “never be too high.” In contrast, in 1953, President (and former 5-star general) Dwight D. Eisenhower, compared the cost of a bomber plane with numerous forgone civic projects.