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The Opportunity Cost Neglect of Money and Time: The Role of Mental Budgeting
Linköping University, Department of Management and Engineering, Economics.
Linköping University, Department of Management and Engineering, Economics.
2018 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesisAlternative title
Försummelsen av alternativkostnaden för pengar och tid : Mental budgetings roll (Swedish)
Abstract [en]

Consumers often fail to consider the alternative ways to spend money when making decisions to buy consumer goods, this is called opportunity cost neglect. In this experimental study, our objective was to replicate the previous research of Frederick et al. (2009) showing that reminding individuals about the opportunity cost affects their decisions. Furthermore, we also wanted to extend the knowledge about this behavior by investigating whether individuals neglect the opportunity cost when making financial decisions or decisions about time allocation. In addition, we hypothesized that individuals who conduct mental budgeting (i.e., they categorize-, budget-, and track expenditures to mental accounts), are more likely to neglect the opportunity cost since they do not treat money as fungible.

In an online experiment, we measured how being reminded about the opportunity cost would affect the probability of an individual buying a cheap and an expensive consumer goods, of investing money, and of watching a movie. Furthermore, we measured how being reminded about the opportunity cost affects the decision of those who conduct mental budgeting and those who do not. Our results showed that individuals neglect opportunity cost of the expensive consumer good and time (p=0.1). We found a positive relation between conducting mental budgeting and opportunity cost neglect for the expensive consumer good (p=0.1) and the deposit account (p=0.05), but no such effect in the other three scenarios.

Our results imply that, due to opportunity cost neglect of time, people might be even further from optimal decision making than previously suggested since it extends to decisions about time allocation, and perhaps to investments; and people who conduct mental budgeting sometimes spend less/save more when reminded about the opportunity cost.

Place, publisher, year, edition, pages
2018. , p. 41
Keywords [en]
Behavioral Economics, opportunity cost neglect, mental budgeting, time
Keywords [sv]
Beteendeekonomi, försummelse av alternativkostnader, mental budgeting, tid
National Category
Economics
Identifiers
URN: urn:nbn:se:liu:diva-148668ISRN: LIU-IEI-FIL-G--18/01910--SEOAI: oai:DiVA.org:liu-148668DiVA, id: diva2:1219163
Subject / course
Bachelor Thesis in Economics
Available from: 2018-06-18 Created: 2018-06-15 Last updated: 2018-06-18Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
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  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf