Abstract
People often neglect opportunity costs: They do not fully take into account forgone alternatives outside of a particular choice set. Several scholars have suggested that poor people should be more likely to spontaneously consider opportunity costs, because budget constraints should lead to an increased focus on trade‐offs. We did not find support for this hypothesis in five high‐powered experiments (total N = 2325). The experiments used different products (both material and experiential) with both high and low prices (from $8.50 to $249.99) and different methods of reminding participants of opportunity costs. High‐income and low‐income participants showed an equally strong decrease in willingness to buy when reminded of opportunity costs, implying that both the rich and the poor neglect opportunity costs. © 2017 The Authors Journal of Behavioral Decision Making Published by John Wiley & Sons Ltd.
Highlights
Do the poor and the rich make financial decisions differently? Several studies show that they do
Several scholars have predicted that the poor are less likely to suffer from opportunity cost neglect—failing to consider alternatives outside of a choice set which may result in suboptimal choices (Frederick et al, 2009; Jones et al, 1998; Legrenzi et al, 1993; Northcraft, 1986)
Before testing the hypothesized interaction effects, we tested for effects of reminding of opportunity costs and income on choice; we found evidence for both these main effects
Summary
Do the poor and the rich make financial decisions differently? Several studies show that they do. 8) argue that “the poor may exhibit basic weaknesses and biases that are similar to those of people from other walks of life, except that in poverty, there are narrow margins for error, and the same behaviors often manifest themselves in more pronounced ways and can lead to worse outcomes.”. Taken together, these different findings strongly suggest that ideas about differences in financial decision making between the poor and the rich should not be taken at face value, but rather be empirically tested. The studies that we conducted used an established paradigm (Frederick et al, 2009) and a population previously used in research comparing the decisions of the poor and the rich (e.g., Callan et al, 2016; Shah et al, 2015)
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