As the father of two children I see it as my job to give them some appreciation of money. Also, given my work, I show them how they’re influenced by shops and manufacturers to buy particular products and, once they’ve bought them, encouraged to spend more.

Something must be getting through because, just yesterday, my six year old daughter talked about her conscious and unconscious minds (she was describing her unease about performing at a large theatre with her ballet class, and being conscious of the people watching her).

I remember learning about the concept of ‘opportunity cost’ when I was studying economics. Until that point I had never consciously considered spending money in terms of what I wouldn’t be able to buy if I bought a particular product at a particular cost.

I don’t think that I was unusual in not thinking in economists terms naturally: if behavioural economics has taught us anything (and it’s taught us a lot) it’s that consumers don’t behave rationally.

In the past couple of years two studies have explored the concept of opportunity cost with consumers in more depth. The first looked at what happened when you actively made customers aware of the opportunity cost involved in a purchase, by telling them that not buying a $15 DVD would mean “keeping the money for other purchases”.

When all the researchers did was remind people that there is an opportunity cost involved in buying something, the proportion of people who chose to buy the DVD dropped by 20%.

In a second experiment they explored how people would be influenced by pointing out that buying an iPod Touch with less memory – 16Gb rather than 32Gb – would mean “leaving you with $100 in cash”. The proportion of people choosing the cheaper product almost doubled.

More recently, a study published last month found that framing purchases weekly rather than monthly caused people to consider the opportunity cost of a purchase more carefully. Whilst some people had a tendency to plan more than others, the general pattern that emerged showed that when purchases were framed against a smaller amount it made people more careful about their expenditure.

These studies show how opportunity cost is closely linked to framing. How you make a consumer consider a price has a significant influence in the choices that person makes: the notion that there is a rational consumer making balanced decisions about how to meet his needs couldn’t be more wrong.

As with most studies that highlight the potential for influencing consumer behaviour this study can be leveraged by salespeople wanting to encourage customers to buy – simply ensure that they are considering the purchase against a much larger financial frame of reference and avoid referencing how else the money they have might be spent.

For consumers, giving yourself a smaller frame of reference, such as a monthly budget, and actively considering what else you may need or want to buy with the money you are spending, will help ensure you buy more carefully.

Sources: Shane Frederick, Nathan Novemsky, Jing Wang, Ravi Dhar, and Stephen Nowlis. Opportunity Cost Neglect. Journal of Consumer Research, December 2009 (published online April 22, 2009)10.1086/660045

Image courtesy: Andrea Rinaldi