Thinking and Deciding

MENTAL ACCOUNTING 301
When we evaluate outcomes, we often look for points of comparison, or “norms,”
even when no decision was involved. Our reactions depend on the comparison that
comes to mind most easily. Consider the following case (from Kahneman and Tversky,
1982b):
Mr. C and Mr. D were scheduled to leave the airport on different flights,
at the same time. They traveled from town in the same limousine, were
caught in a traffic jam, and arrived at the airport 30 minutes after the
scheduled departure time of their flights. Mr. D is told that his flight left
on time. Mr. C is told that his flight was delayed, and left only 5 minutes
ago. Who is more upset?
Most people agree that Mr. C is more upset. It is easier for Mr. C to imagine how
things could have been otherwise. These mental simulations of alternative outcomes
function as reference points to which the real outcome is compared.
Opportunity costs
Economists and accountants use the term “opportunity cost” to refer to the benefit of
a forgone option relative to the status quo. Consider two business ventures. Both cost
$10,000. Venture A is expected to return $11,000 in a year. Venture B is expected
to return $11,500 in a year. Venture B uses some materials that you already own,
which you could sell for $1,000 if you don’t use them. It is tempting to decide in
favor of venture B because it yields a larger profit, and many people do indeed make
this choice (Becker, Ronen, and Sorter, 1974). But this is a mistake. Venture B
will “cost” an additional $1,000 because the materials cannot be sold. This is the
opportunity cost. We can also think of this as a benefit of A: If we undertake A, we
gain an additional $1,000 from selling the materials. It does not matter how we think
of it: Venture A is still better.
It is easy to neglect opportunity costs when considering whether to make a transaction
or do nothing. For example, suppose that you are buying a car and you are
offered a low-interest loan. If you have sufficient cash to buy the car outright, you
may reject the loan, thinking, “Why should I pay interest if I don’t have to?” But if
you spend your cash, you also lose the interest that you could make by investing that
cash. If the investment interest is higher than the interest you must pay on the loan,
then you should take the loan. (In real life, the decision is more complex because
of taxes.) In making decisions like this, it is often useful to focus on the differences
between the options rather than on the gains or losses of one option relative to a
reference point.
Positive and negative attributes
We sometimes think of decisions negatively as dilemmas in which we must choose
the lesser evil, as when we must choose between two unpleasant medical treatments.