Choosing is losing: How opportunity cost influences valuations and choice

Abstract

We propose a model of choice that accounts for opportunity costs actually suffered, as a result of renouncing the alternative not chosen. The valuation of each option is relative: The decision maker subtracts from the standard utility of any given option the psychological cost of giving up the alternative. In the presence of a default option, the final inclination of a person is the net effect of a ‘conservative’ disposition to keep the default and an ‘adventurous’ disposition toward choosing an alternative. This trait-like inclination is captured by the difference in sensitivity to giving up the default option or its alternative(s). When the options have elements in common, the conservative and adventurous dispositions operate only on their distinguishing elements. Unlike previous conceptualizations of anticipated regret, our decision maker suffers most when the foregone option is of comparable value to the chosen one. Our model can explain the empirical regularity that faced with the same choice, some people tend to favor the default option (a form of endowment effect), while others tend to favor its alternative (a form of fear of missing out). In the presence of several alternatives, the decision maker compares the default option with the best option among the alternatives.