Opportunity cost: what the budget alone cannot show
Investment proposals readily detail a project’s cost, but less consistently describe alternative uses of the resources it requires. The managerial question is precise: before committing a budget or a team, should the organisation explicitly state what it is giving up?
What the literature establishes
Shane Frederick, Nathan Novemsky, Jing Wang, Ravi Dhar and Stephen Nowlis (2009, Journal of Consumer Research) show, in consumer choice experiments, that participants do not consistently consider alternative uses of their money. Simply reminding them that not buying leaves resources available for other purchases can change their choice. Opportunity cost is therefore not necessarily incorporated into judgement, even when the budget constraint is understandable.
What makes the trade-off visible
Stephen Spiller (2011, Journal of Consumer Research) examines the conditions under which consumers consider opportunity costs. His findings indicate, among other things, that perceiving resources as more constrained encourages such consideration. The relevant mechanism is not simply knowing the price: it is bringing competing uses of the same resource into the decision.
The premature conclusion
One might conclude that listing the projects being sacrificed is enough to improve any decision. These studies show that making alternatives salient can change a choice, not that the resulting choice necessarily maximises value for an organisation. An unrealistic alternative, or one selected to discredit the project under review, can itself steer the trade-off. (our executive and employee training programmes)
What the evidence does not allow us to transfer directly
These studies concern consumer choices, not investment decisions in Zurich-based companies. Within an organisation, resources are not always interchangeable: an available budget cannot replace a scarce skill, and regulatory expenditure may be unavoidable. Nevertheless, the common practice of checking only whether funding is available remains incomplete: it establishes financial feasibility, not the project’s superiority over competing uses of its resources.
A practical check in Zurich
Within SHR’s « Decision-making » programme, an exercise applicable to financial services, insurance, tech and the European headquarters of international groups in Zurich is to add a section to proposals submitted for a decision over one month. It identifies the limiting resource, another feasible use of that same resource, and what would be postponed or abandoned if the project were approved. The measure is the proportion of all proposals reviewed that contain these three elements, verified by the person responsible for the resource concerned. This indicator checks whether the trade-off is documented; it does not, on its own, prove that decisions are better. To go further: explore the Decision-making training in Zurich, or browse our executive and employee training programmes in Switzerland.
In pictures: Decision-making in Zurich
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