SNS Research Brief 77: The psychology of opportunity costs: Emotions and cost effectiveness in public policy decision making

Gustav Tinghög

SNS Analys 2021.10.01

Intuition, unconscious rules of thumb and conscious misinterpretations influence our choices when making decisions – both personally and when it comes to using public funds – according to economist Gustav Tinghög. In the SNS report “The Psychology of Opportunity Costs – Feelings and Cost-Effectiveness in Public Sector Decisions,” he summarizes the results of behavioral experiments on decisions related to prioritizations in the health care sector.

SNS Research Brief 77. The psychology of opportunity costs 36.3 KB PDF

Tinghög shows that when faced with decisions related to public spending, not just ordinary citizens but also public decision-makers often ignore the fact that the resources in question may be used in other ways. For instance, in an experiment, the participants had to make decisions regarding implementing a health care reform. Half the participants were informed that there were also other things that the money could be spent on, whereas the other half did not receive any such information. It turned out that the ones told about the existence of an alternative use were less likely to think that this reform should be implemented. This applied to both ordinary citizens and experts in the field of health care.

“This inability to consider opportunity costs may offer an explanation as to why public spending frequently exceeds the stipulated budget. Above all, however, this means that our scarce resources are not used where they are the most beneficial. In the long run, this can lead to increased suffering, the loss of life and political polarization” says Gustav Tinghög.

Tinghög argues that decision-makers need to adopt a more structured approach to opportunity costs when making both large and small decisions. It is important that we develop systems and routines that help decision-makers consciously balance costs against benefits when making decisions.

The research carried out by Gustav Tinghög also shows that feelings play a major role when prioritizing and that this may explain why opportunity costs are ignored.

“When making decisions, we typically choose the option that is the most prominent emotionally as well as the easiest to justify to both ourselves and to others. Therefore, public decision-making is often motivated by a fear of making mistakes rather than a desire to do the right thing,” says Gustav Tinghög.

“Patient safety represents an example of an aspect that often seems to win over all other aspects when deciding on the use of societal resources. Decision-makers rarely openly think in terms of cost-effectiveness or an alternative use of resources when it comes to patient safety or minimizing other types of risks,” argues Gustav Tinghög.

About the author and the report

Gustav Tinghög is an associate professor at Linkoping University and heads the interdisciplinary research group JEDILab (Judgement Emotion Decision and Intuition Lab). He is also tied to the National Centre for Priorities in Health at Linköping University. His research concerns how intuition and analytical thinking not only affect everyday decision-making but also priorities and decision-making in the health care sector.

The report is based on the article “Opportunity cost neglect in public policy” published in Journal of Economic Behavior & Organization.