Research Article: Opportunity Cost Neglect in terms of Time rather than Money University of Stirling Management School Abstract: Dilemmas in decision-making in terms of consumer behavior can arise due to the presence of time and money. However, some decisions can be affected when deciding too soon or too late in order to purchase goods or acquire services, where time factor plays an important role in it. Most consumers fail to interpret the implicit information and neglect the opportunity cost linked with the product. But, some cues and explicit information can create impact upon the decision-making process of consumer by forcing them to consider opportunity cost in the product. This paper will investigate the impact of opportunity cost prompting signal in terms of time domain upon tightwads and spendthrift consumers and how these both consumers act differently with the situation. Introduction: Consumer’s decision-making process is based on how people choose alternatives under scarcity, as this scarcity can be defined as the limited available resources to satisfy one’s needs. The limited resources can be in terms of money, time or other factors. Similarly, people have limited time in which they can select alternatives so that their time can be effectively managed. This scarcity brings the concept of opportunity cost in consumer preferences. The opportunity cost is the cost which must be given up by the consumer after making choice or it can be termed as the value of next best opportunity (Mankiw, 1998). However, the opportunity cost neglect may occur when consumer misses out the implicit information of the product. This information, if provided explicitly can create impact upon the decision-making. But, this impact can vary according to the nature of consumer; either he/she is spendthrift or tightwad. This paper will demonstrate the result of the experiment which was conducted upon randomly selected participants equally distributed within control and treatment groups on the scale of spendthrift versus tightwad in order to evaluate the difference in choices through either providing opportunity cost information or not. Literature Review: The evaluation of opportunity costs involves customers to fully regard those options that are not explicitly mentioned on the product during the purchase. However, according to many past researches upon consumer behavior, the decisions and judgments of consumers somehow rely upon the information that is openly available regarding the benefits and usefulness of the product or side effects and demerits of the product (Kahneman & Frederick, 2002; Slovic, 1972). But, there are some people who incline towards the comparison between prices and opportunity costs. The relationship between opportunity cost and price is often supposed to be clear (Okada & Hoch, 2004). These consumers may fail to impulsively react upon the opportunity costs when deciding to pay for goods or services. Many studies have posited that the degree of spontaneous reaction upon opportunity costs may vary according to the type of consumers in terms of their feeling of pain while paying or spending money (Rick, Cryder & Loewenstein, 2008). In this regard, Frederick et al. (2009) conducted a research based on the tightwad-spendthrift scale of the consumer where around three hundred participants had taken participation in the research via web-based questionnaire. They were divided into two groups, where one group served as a control group whose participants encountered with the question in which they were asked to select a stereo system in which one system was around $1000 with 60 watt per channel amplifier and a 6-disc CD changer (e.g. more features and more advanced), whereas other system which was around $700 with 30 watt per channel amplifier and a 5-disc CD changer (e.g. less features and less advanced), however the difference in price was implicitly available. The other group served as a treatment group where they were asked the same question but the price difference was explicitly described. As a result, those respondents who described themselves as tightwads reacted less upon the explicit information and chose the cheaper option as compare to their counterparts. Since opportunity cost can be termed in many ways (i.e. money, time, etc), but decision making may vary according to the nature of opportunity cost. Consumer often neglect opportunity cost based on money but act differently when time is involved (Soman, 2001). The reason behind this difference is that many people cannot easily convert their time into money; as a result they usually do not get trapped in the sunk cost fallacy when time is invested. This explanation can define that people act like ignorant when they have to value their time in terms of money. This research will further examine the behavior of tightwads and spendthrift consumers upon the opportunity cost in terms of limited time and their preference to buy expensive air tickets which can save their time and a stopover. Methodology: Participants: The participants of this survey took part in this survey through Facebook and Emails in which 5 to 10 participants were recruited by 19 students each. Total 130 responses were received from the participants, which were further processed by filtering out missing values. At the end, only 121 valid responses were included in the research in which 43.55% were males and 56.45% were females with the average age of 28 years (See Appendix). The participants were asked about their frequency of travelling through airlines, luckily every participant had at least travelled once through airplane, which made the sample more attractive for this survey. Questionnaire: The questionnaire which was formed on Qualitrics divided into three major parts. In first part, the participants were shown with informed consent screen. In second part, the participants who were in control group were shown with illustrations having choice of two airline tickets. Similarly, the treatment group participants were also shown illustrations having same choices but with opportunity cost prompt. In third part, the participants were asked about their age, gender, frequency of flying and most importantly their trait through tightwad-spendthrift question. Procedure: The data was collected for the purpose of finding out the relationship of neglecting opportunity cost by tightwads and spendthrifts consumers if prompted with explicit information regarding the opportunity cost. The dependent variable was the choice of £158 ticket in order to reach Greece for friends get together (i.e. choose158). While, independent variables were opportunity cost prompt (i.e. treatmentcond) and tightwad-spendthrift scale (i.e. TSScale). The participant were further divided on the basis of tightwad-spendthrift scale through which they were asked two likert scale questions which were based on if participants feel troublesome while limiting their spending (i.e. Sspendthrift) and or else they feel troublesome while spending their money (i.e. Stightwad). The characteristic of the participants was explored through simple formula (i.e. Sspendthrift + (6 – Stightwad) = TSscale), in which the TSscale value was between 2 (most tightwad) and 10 (most spendthrift). So, according to this formula, the participants can be called tightwad if his/her TSscale is less than 6, and can be called spendthrift if his/her TSscale is greater than 5. Analytical method: The analysis has been done on Stata 13 with the help of Binary Logistic Regression analysis tool. This tool is used for dichotomous nature of dependent variable (i.e. choose158) which has only two possible outcomes either “yes” or “no”. Binary Logistic Regression is the proper tool to find out interaction effects between the variables if the dependent variable is dichotomous in nature and independent variables are categorical in nature (Spicer, 2004). In this case, our independent variables are categorical in nature, so this tool is useful in this research. Results: To examine the effect of showing explicit information regarding opportunity cost to tightwads and spendthrifts, the binary logistic regression model was implemented. It was hypothesized with three assumptions mentioned below: H1: Those participants who were present in treatment group will more likely to choose expensive flight. H2: Those spendthrift participants who were present in the treatment condition will more likely to choose the expensive flight as compared to tightwads who will be immune to availability of explicit information. However, after applying logit analyses between choice of expensive tickets and treatment condition in order to verify the H1, we come to know that the results were not statistically significant with the p value of approximately 0.320, which is greater than 0.05. The frequency of responses was also analyzed along with the expected frequency by using cross tabulation. So, the results from logistic analyses hence rejected the H1 (see Table 1 and 2). Table 1: Logistic Regression between choose158 and treatmentcond Table 2: Cross Tabulation with respect to observed and expected frequencies The second hypothesis was also analyzed through similar procedure. However, the groups then further divided into tightwads and spendthrifts through Tightwad-Spendthrift scale. According to table 3, there were around 68.60% participants who had shown their trait as spendthrifts and 31.40% participants who had shown their trait as tightwads. Table 3: Tightwads and spendthrifts However, the logistic analysis was also performed on participants with respect to tightwads and spendthrifts, which resulted that those participants who were described themselves as spendthrifts were not much likely to choose expensive tickets in the treatment group. In simplified terms, there was no such difference in responses between participants in control group and treatment group with the p value of 0.886, hence statistically insignificant (see Table 4). Similarly, there was also not enough difference in the responses of tightwads either present in control group or in treatment group, with the p value of 0.061(see Table 5), thus rejecting H2. Table 4: Logistic Regression upon responses of Spendthrifts Table 5: Logistic Regression upon responses of tightwads Discussion and Conclusion: From the above results, it has been concluded that there is no relationship between opportunity cost prompt and consumer preference for choosing expensive tickets along with time constraint whether he/she is tightwad or spendthrift, hence validating null hypothesis. The reason behind this type of result may be the involvement of time constraint rather than money constraint through which the result differs from the experiment done by Frederick et al. (2009), as consumers act differently when time is invested rather than money (Soman, 2001). The majority of the participants described themselves as spendthrift, but the irony is that the majority of the participants whether they were tightwads or spendthrifts chose cheaper tickets to fly to Greece (i.e. 64%, see Table 2). This shows that there is some flaw in the experimental design due to which majority of the participants chose cheaper ticket spontaneously, indirectly posing threat to internal validity of the experiment. This is because the price difference between both tickets was around £91, which is quite big difference. So, most of the people felt that £67 ticket is more beneficial which is just consuming around 6 extra hours, that can be somehow manageable. In this case, participants failed to convert their precious time into money. They felt that wasting time is less detrimental and less unfavorable than wasting money. However, the sample size was too small which cannot be generalized with mass population hence posing a major threat for external validity of the experiment. The experiment can be more authentic when it will be conducted on real passengers at airports. They would definitely give proper responses as they were actually experiencing the depiction of scenario. References: Frederick, S., Novemsky, N., Wang, J., Dhar, R., &Nowlis, S. (2009), “Opportunity cost neglect” Kahneman, Daniel and Shane Frederick (2002), “Representativeness Revisited: Attribute Substitution in Intuitive Judgment,” Mankiw, N. Gregory (1998), “Principles of Microeconomics” Okada, Erica M. and Stephen J. Hoch (2004), “Spending Time versus Spending Money” Rick, Scott, Cynthia Cryder, and George Loewenstein (2008), “Tightwads and Spendthrifts” Slovic, Paul (1972), “From Shakespeare to Simon: Speculations— and Some Evidence—about Man’s Ability to Process Information” Soman, D. (2001), “The Mental Accounting of Sunk Time Costs: Why Time is not Like Money” Spicer, John (2004), “Making sense of multivariate data analysis” Appendix: Table 6: Gender distribution Table 7: Mean of age of the participants