Opportunity cost: meaning and application

A family that buys a new kitchen is also choosing against something else, such as a longer holiday or a buffer in the savings account. That forgone alternative is called opportunity cost. Research shows that people often only take it into account when someone makes it visible.

Opportunity cost is the value of the best alternative you give up when you choose an option.

If you spend money, time or attention on one thing, you can no longer spend it on another. Experiments show that consumers often do not think of such alternatives spontaneously. A reminder of other uses for the money then lowers willingness to buy. The effect is, however, smaller and more context-dependent than the first studies suggested.

Every choice has a flip side. Opportunity cost is the value of the best alternative you give up by choosing. Plantinga and colleagues describe it as the potential benefits of the best non-chosen option (Plantinga et al., 2018).

It is not only about money. Time, attention and energy are limited too. An evening on a course is an evening less with friends.

Note the word "best": opportunity cost is not the sum of everything you could have done.

Opportunity cost is an economic concept. In Cost and Choice (1969), the economist James Buchanan describes how the Austrian school in particular, including Menger, Böhm-Bawerk and von Wieser, saw the cost of resources as the value of what the same resources could have produced elsewhere. Buchanan does not attribute the concept to a single originator. He traces it through several economists, including Wicksteed and Knight, and through the tradition of the London School of Economics (Buchanan, 1969/1999).

Buchanan himself emphasised the chooser: cost is the value a person places on the most attractive alternative they forgo. That value exists only at the moment of choice and cannot be measured afterwards, because the alternative never materialises. This makes opportunity cost a subjective concept: two people with the same budget may give up very different alternatives.

Behavioural research shows that people do not weigh alternatives automatically. In 2009, Frederick, Novemsky, Wang, Dhar and Nowlis called this opportunity cost neglect. Their starting point: to take opportunity cost into account, consumers must actively generate the alternatives a purchase would displace. Often, they do not (Frederick et al., 2009).

In the best-known experiment, participants could choose whether or not to buy a DVD for 14.99 dollars. For half of them, the option "not buy" carried the addition that they could keep the money for other purchases. This short reminder lowered willingness to buy, as Maguire and colleagues describe the design (Maguire et al., 2023).

According to Frederick and colleagues, such cues reduced purchase rates, even when participants were encouraged to think carefully. How sensitive people were to them was related to their attitude towards spending money.

Later studies qualify this picture.

When people do weigh alternatives. Spiller (2011) found that perceived constraints, such as a tight budget, prompt consumers to think of alternatives. People with a high propensity to plan do so even without such a cue. The alternatives retrieved depend on how categories are organised in memory. If the alternatives are unattractive, considering them changes little about the choice (Spiller, 2011).

Income matters less than expected. Plantinga and colleagues tested whether people on low incomes weigh alternatives more spontaneously. In five experiments with a total of 2,325 participants, they found no support for this. A reminder lowered purchase intention by roughly the same amount in both income groups (Plantinga et al., 2018).

The effect is smaller than thought. A meta-analysis of 39 experiments with 14,005 participants found a robust but small effect (Cohen's d = 0.22), clearly smaller than the original estimates (d = 0.45 to 0.85). The authors found indications of publication bias and point out that most studies use hypothetical choices (Maguire et al., 2023).

Okada and Hoch argue that the value of time is ambiguous: time is less easy to exchange and add up than money. In their experiments, people were more willing to invest time in risky options with a high potential return, whereas they were more cautious with money. Afterwards, they more easily adjusted the value of time spent when an outcome disappointed (Okada & Hoch, 2004).

Opportunity cost also matters in choices about timing. Across eight studies, Read, Olivola and Hardisty found that people choose more patiently when you make visible what they miss out on later by choosing now. If you point out what they miss out on now by waiting, little changes (Read et al., 2017). How strongly people discount future rewards is explained in the article on delay discount rate (k).

Opportunity cost is often confused with sunk cost. Sunk costs are costs that have already been incurred and cannot be recovered. Arkes and Blumer described the sunk cost effect as the tendency to continue an endeavour once money, effort or time has been invested in it. According to economic theory, only future, incremental costs and benefits should count, not what has already been spent (Arkes & Blumer, 1985).

The difference lies in the direction of time. Sunk cost looks back at what is already gone. Opportunity cost looks ahead to what you give up with the choice in front of you.

Opportunity cost plays a role in three kinds of choices.

• Money: a purchase displaces other spending or saving. With large expenses, this trade-off is more visible than with small, repeated ones.
• Time: an appointment, course or project costs hours that do not come back. Because the value of time is ambiguous, the forgone alternative often remains vague.
• Priority: in organisations, every chosen project costs capacity that cannot go elsewhere. That trade-off stays implicit as long as nobody puts the alternatives side by side.

A target group profile sometimes describes what people do instead of using your solution; see costly alternatives. Opportunity cost is broader: it covers everything that, in the chooser's eyes, competes with your offer for the same money, time or attention.

If people do not weigh alternatives spontaneously, research that does not ask about them will miss them too. A question such as "How attractive do you find this offer?" tests one option in isolation.

So ask explicitly where the money or time would otherwise go. Have respondents name the best alternative and rate its attractiveness. An association task can use the alternative as a prompt alongside the offer; read how you measure associations. A split sample, with and without a reminder of alternatives, shows how sensitive the choice is to that perspective.

Interpret such a difference as an effect of this design in this sample, not as a fixed trait of the target group.

Because a reminder of alternatives can shift choices, this also matters for communication. According to Frederick and colleagues, such cues increase the choice share of more affordable options (Frederick et al., 2009). An affordable provider can therefore point to what you have left over for something else.

There are ethical limits. Making alternatives visible supports a more complete trade-off; deliberately hiding or exaggerating them undermines it. A fair test: would the chooser still accept the message if they knew how it works? Read more in neuromarketing ethics. Always test a message against an outcome measure defined in advance; see testable messages.

1. Define the choice. Describe which decision you want to understand and which resource (money, time or attention) it involves.
2. Ask about alternatives. Let respondents name what else they would do with that resource.
3. Have the best alternative rated. Ask about attractiveness, certainty and timing.
4. Compare with and without a reminder. Use a split sample to test sensitivity to alternatives.
5. Interpret with care. State the sample, the context and the difference between hypothetical and real choices.

This example is fictional.

Situation. A family is torn between a new kitchen and a longer holiday. A kitchen retailer notices that many visitors request quotes but do not buy.

Choice question. Are visitors dropping out because of the kitchen itself, or because of what they would give up for it?

Available information. The retailer knows the number of quotes and purchases, but not which alternatives people consider.

Suitable approach. A questionnaire asks which other spending plays a role and how attractive it is. Half of the respondents receive a reminder of other spending when making the choice; the other half do not. An association task with the prompts "new kitchen" and "longer holiday" shows which meanings both options evoke.

Possible interpretation. If many respondents name the holiday as the best alternative and purchase intention drops with the reminder, opportunity cost probably plays a role. There are no results yet; this is a research plan.

Next step. Test honest communication that acknowledges both values, for example by presenting a kitchen as an investment for everyday use, without belittling the holiday.

• Confusing opportunity cost with sunk cost. One looks ahead, the other looks back.
• Adding up all alternatives. It is about the best alternative given up, not the sum.
• Assuming nobody weighs alternatives. People who plan or feel constrained do so more often.
• Adopting the original effect size. The meta-analysis found a clearly smaller effect.
• Asking only about the offer. Without a question about alternatives, the real trade-off stays invisible.

You can conclude that, in experiments, a reminder of alternatives lowers willingness to buy on average. You cannot conclude that everyone ignores alternatives, or that a reminder works equally well with every target group. The effect differs by domain: the evidence is strongest for consumer choices, while other domains call for more caution (Maguire et al., 2023).

Most studies use hypothetical choices and online samples, often from the United States. Whether the effect is as strong for real purchases, outside the United States or for business decisions has been studied less. Moreover, group averages do not predict what one individual will do.

Opportunity cost shows what every choice costs in missed alternatives. People often do not weigh them spontaneously, but this varies by person and situation, and the effect is smaller than first thought. So ask about alternatives explicitly in research, and make them visible honestly in communication.