Costly phone or a holiday? Look at opportunity cost

"I have been trying to call you all day," she said, as soon as she entered.

"Oh. My phone has been switching on and switching off on its own," I explained. "And so I have been unreachable through most of the day."

"You know, in my experience, these cheap mobile phones don't really last long," she said passing judgement on my purchase.

"The phone wasn't cheap at all. It cost 15k."

"That's it?"

"A mobile phone is a utility for me, it doesn't give meaning to my life."

"Getting philosophical are we."

"That's the truth."

"You know you should buy this beauty," she said, showing me her mobile phone.

"Beauty?" I asked.

"Look at its curves."

"How much does it cost?"

"Just Rs 65,000."

"Rs 65,000!" I exclaimed, as I almost fell of the chair. "What else does it do, other than helping me make and receive calls and log on to the internet?"

"What else is a phone supposed to do?" she asked back, without getting the irony.

"Let's go through a thought experiment here," I said. "What else can be done with Rs 65,000?"

"But why are we doing this?" she asked.

"For Rs 65,000 a new motorbike can be bought," I replied, ignoring her question.

"Oh."

"For that price, we could take a reasonably luxurious holiday in Goa or anywhere in South East Asia," I continued. "How about a trip to Bali this year?"

"Hmmm," she said, still not getting where I was heading with this.

"The point I am trying to make here is that when we spend money on one thing, we are basically deciding not to spend money on other things, given that we don't have an unlimited amount of money."

"Now that you put it that way, I get the drift."

"There is a very interesting experiment that Dan Ariely, an Israeli-American psychologist and behavioural economist carried out at a Toyota dealership. He talks about it in his book Dollars and Sense—Money Mishaps and How to Avoid Them."

"And what was this experiment about?" she asked.

"Basically, Dan went to a Toyota dealership and asked the prospective buyers there a very simple question: "What would they give up if they purchased a new car?""

"And what was he answer he got?"

"Well, almost no one answered. The funny thing is that these were people who were ready to spend thousands of dollars on buying a car, but hadn't thought about the possibility of spending this money on other things."

"So, now I know what you were trying to do," she said. "You are never really original V."

"Well. Anyway, so Ariely then tried to push the envelope a little further and asked: "What specific products and services they wouldn't be able to get if they went ahead and bought that Toyota?"".

"And what happened then?"

"People said stuff like, if they didn't buy a Toyota, they would have bought a Honda or some such car."

"Oh."

"In fact, few people still got the point, that the money they were spending on the Toyota could be spent on other experiences as well."

"That's surprising," she said.

Just then, I pulled out Ariely's book from the almirah and decided to read out from it.

"In fact, as Ariely writes along with the co-author Jeff Kreisler: "They were seemingly unable or unwilling to think of the money they were about to spend as their potential ability to buy a sequence of experiences and goods over time in the future. This is because money is so abstract and general that we have a hard time imagining opportunity costs… Basically, nothing specific comes to mind when we spend money except the thing we're contemplating buying,""

"We don't consider the opportunity cost."

"Yes. And when we don't consider opportunity costs, as Ariely and Kreisler put it: "The odds are that our decisions are not going to be in our best interests."

"Well, I get your point."

"Thanks. I think I know which phone I want to buy," I said, showing her an image of the phone, on my laptop.

"Oh, but how can you buy this one?" she asked. "It doesn't even cost 10k."

(The example is hypothetical) 
(Vivek Kaul is the author of the Easy Money trilogy)