Economics question: What is the name for the cost of making the wrong choice?

Transaction costs include many things; finding your cocontractant, agreeing on a trade, making sure the deal is executed. Transaction costs are well studied; even Coase was going on about them and making major points 50 years ago.

One of the transaction costs is finding out about the good you’re going to purchase so that you make the best possible transaction. E.g.: If I intend to buy a monitor, I’m going to spend some time on Internet learning about them and I’m going to ask friends for information. When considering the purchase of a particular monitor, I’m going to spend some time examining it, perhaps even testing it. That is a transaction cost.

I am doing this to avoid making a wrong choice. I want to make the optimal purchase. Sometimes, it won’t be worth it to spend 10 hours learning about a particular topic just to find a good that’s a little better. Sometimes it will be worth it.

Is there such a thing as a section of economics that studies the costs of making the wrong choice when making a transaction?

I bought an ok pair of shoes for 150$ but then found an incredible pair of shoes for 55$, I’d made a mistake that cost me 150$ I could have put to better use.
I also once purchased a watch for 90$. Later I found a much better watch for 140$. I had already purchased the 90$ watch and would rather have put that money towards buying the 140$ watch.

When purchasing the services of a lawyer, making the wrong choice of lawyer can incur significant losses.

Those are all costs (if only because of missed opportunities). How can I find out more about it?

Perhaps you are thinking of Opportunity Cost?

I was thinking this might come down to simple opportunity cost, hence the mention of missed opportunities.

Is there research done on the optimal way to balance out transaction costs with opportunity costs, especially in incomplete information environments? Most of the time, doing some more research or testing could lead to finding a better option. At other times, it’s not worth it to do additional research on a good.

Are there normative theories (theories about the optimal way to do it)?
Are there descriptive theories (how people actually do it)?

I was going to say opportunity cost as well, but then studied the OP a bit further.

Here is a typical example of opportunity cost. Let’s say I’m a merchant and I’m going to donate merchandise to a charity. The cost to me of that merchandise is $100. I get a tax deduction that results in a tax reduction of $25, so the net cost to me was $75. However, the same merchandise would sell for $150 in my store, so I could have made a profit of $50 by selling it instead of giving it away. My cash outflow for donating was $75, vs. a net cash inflow of $50 for selling at a profit, so the opportunity cost to me of making a donation was $125. That is, instead of being out $75, I could have been ahead by $50.

(The donation case is a little strained because the value to me was the good feeling I got for making a donation instead of economic value, but the arithmetic is easier to explain.)

Opportunity cost is about evaluating the costs of alternative uses of resources. Usually opportunity costs are part of analysis for a decision, not something you figure out after it’s too late.

Finding out after the fact that you could have bought something cheaper or gotten a better value could probably be thought of as an opportunity cost, if there is any way that additional research could have avoided it. But in my book it is just called “shit out of luck.” :slight_smile:

I just read your second post and you are looking for something much more scholarly than what I can offer. I took one econ course at the graduate level but it didn’t cover consumer behavior, kind of an interdisciplinary study of econ and psych. I’ll watch with interest to see if you get a better answer.

The general question you’re asking–when is it worth it to keep looking?–falls under the economic area known as search theory. There’s about fifty years of literature on the specific economic problem, and about fifteen more if you go back to the oldest optimal stopping results. I’m only familiar with the very basics of the latter, so I can’t speak to any of the details, but there are very likely both normative and descriptive theories here.

How about “risk analysis”? You’re essentially calculating the loss from a bad decision.

There is some research on optimal algorithms for finding a “good enough” solution when there is unknown information. None of them are perfect, of course, because they deal with unknowns, but there are different heuristics you can use to try to optimize certain things.

For buying something, it sounds like you want something like the Secretary Problem, which deals with finding the “ideal” person to staff for a job, when there are an unknown number of applicants and you interview them in a random order. The optimal strategy for n candidates is to review the first n/e of them, then keep looking until you find one better than everyone you’ve seen. You could probably modify the math to count for transaction costs in reviewing candidates.

As a reasonable rule of thumb, I’ve heard that looking at 7 options at random, then keep looking until you find one better than anything you’ve seen yet (or until you give up), then buy the best one you’ve seen.

I’m used to seeing this referred to as the cost of sub-optimal decision-making. However, although I occasionally read papers by economists, I am not an economist myself.