By Susannah Hume, King’s College London and Behavioural Insights Team |
‘Opportunity cost’ is a cornerstone of microeconomics that has a great deal of relevance to how and why we should care about evaluating access initiatives. In this blog post, I am going to discuss first of all what the ‘pure’ microeconomic model of opportunity cost is; then how this can be translated to a principle guiding the prioritisation of access initiatives; and finally, how this links to evaluation methods.
Opportunity cost: the value of the best alternative foregone
Microeconomics is concerned with the issue of the allocation of scarce resources: we have limited money and limited hours in the day, so how should we spend them to get the maximum benefit?
Every time we make a choice—to go to a restaurant for dinner, or walk home instead of taking a taxi, or buy box sets of all 29 seasons of the Simpsons, we’re placing a value on each of the options (e.g. restaurant vs. takeaway vs. cooking a meal vs. eating some stale bread with marmite), even if we don’t do that explicitly or consciously.
In a financial sense, if you have £100, and you can choose to either invest it in a savings account at Big Bank for 1% interest or one at Local Bank with 3% p.a. interest. In this context, most people instinctively recognise that they should go for the latter. We instinctively compare the £103 return from Local bank to the £101 return from Big Bank, not just to the £100 direct cost of investing. In this case, we can think of the opportunity cost of investing in Big Bank as the £103 foregone by not investing in Local Bank. As this yields a net return of-£2, it’s a bad choice; we should invest in Local Bank for a +£2 net return.
But of course, ‘value’ is more broad than monetary value. You could also spend that £100, on some combination of the choices above—dining out, taking taxis, buying box sets. If we buy something, we’re implying that we place more value on an item than its cost–for example, we value having all 29 seasons of the Simpsons more than the £300-odd it would cost to acquire them.
However, if we consider opportunity cost, then we also need to value something more than the next best thing we could do with that resource. For example, if we put the money in our Local Bank account (and if it took us a year to watch all the episodes) we’d have £309, so we’re implying we value the Simpsons not only more than the £300 purchase cost, but more than the £309 opportunity cost.
Likewise, when you sit down and start binge watching, you’re implicitly saying, “I value watching all 627 episodes of this TV show more than I value the next best thing I could do with my time.” The opportunity cost is the value you place on whatever you’d be doing if you weren’t marathoning 29 seasons of the Simpsons. Depending on who you are, this might be marathoning 16 seasons of Family Guy, doing 1,248 loads of laundry, or writing the next Great British Novel. But the value of the next best thing for you to be doing is the opportunity cost of the choice you’ve made.
Anyone who’s ever said, “I’ve got better things to do with my time,” is displaying an instinctive awareness of the opportunity cost of their current activities. But overall, humans, as opposed to econs,[i] struggle to consider costs in this way. We tend to just look at the direct costs of doing something, rather than the value of the alternative foregone.
What does this mean for widening participation?
It means that,
- For students: whatever initiative we’re providing, we should be aiming to compare it against the best alternative that young person is foregoing by accessing that opportunity, not just against business-as-usual (or nothing); and,
- For initiatives: whatever initiative we’re providing, we should be aiming to compare it against the next best possible use of the time and funding that is being allocated to delivering this initiative.
In widening participation terms, we’re not so concerned about monetary value; we’re more concerned about likelihood of attending university (in a broad sense)[ii]. Therefore, we should be considering the alternatives for students in terms of increasing their likelihood of attending university, and for WP teams in terms of the alternative initiatives or activities we could be providing in pursuit of this aim.
Opportunity cost for students
We can use the concept of opportunity costs to consider whether we are encouraging students to give their time to the activities that are most likely to increase the likelihood that they apply and are accepted to university.
The key thing here is that a student who doesn’t take up a particular access scheme is not going to go into stasis for the duration of the times when they might have been on the scheme; they are going to have a set of other options for how they can use that time.
For example, we have a student, Asma, who is considering applying to a one-week residential summer school. She’s pretty interested in university, but her mathematics grades might not be good enough. The other things she could do with that week are:
- Intensive studying in mathematics (increases her likelihood a lot);
- Participating in community activities, volunteering, working part-time, etc (increases her likelihood a little bit); and
- Spending time with her family and friends, relaxing (has a neutral effect on her likelihood of going to university).
So in this example the next best alternative she’s forgoing by choosing the Summer School isn’t doing nothing, or even relaxing with family and friends, it’s option 1: a week’s intensive study in mathematics.
Asma should therefore weigh up the benefit of the summer school against mathematics study, and we should be providing her with advice to consider this trade-off, rather than assuming if she weren’t at the Summer School there’s nothing else she could be doing to pursue her goal of going to university.
It may be that a Summer School is still the best thing for Asma to do, considering opportunity cost, but we won’t know that unless we’re able to compare the costs and benefits of the alternatives, and this requires robust, consistent evaluation approaches across programmes.
Opportunity cost for institutions
Institutions face increasingly tight budgets, and even with unlimited money, we’d still have limited time. This means we can’t do everything we’d like to do to support students to get into and through our courses.
We have to make trade-offs. Delivering this summer school to these students, means we can’t deliver that summer school to those. Delivering a set of inspirational talks in Somerset means we can’t deliver inspirational talks in London, and so on. Again, practitioners display an instinctive understanding of this, weighing up the time it would take to get to Somerset and to coordinate ambassadors to deliver those talks, against the closer and broader reach of working in London, and the fact that students in London face fewer structural barriers (such as not wanting to relocate) than students in Somerset.
But without robust causal evaluations of initiatives, we’re basing these trade-offs solely on instinct. For instance, maybe all the students who turn up to inspirational talks in London are probably going to go to university anyway, so we’re allocating effort to an intervention that is actually not effective with those students. This gets to what Professor Neil Harrison has called ‘deadweight’—effort we are allocating towards students who would have achieved the outcome anyway. On the other hand, although it’s harder to get to Somerset, maybe we can make a real difference to those students’ outcomes by doing so.
How does this link to evaluation methods?
Thinking about opportunity costs requires us to have a good idea not only of how much time and resource is going in to an initiative, but much benefit an initiative is providing to the young people receiving it.
This requires that evaluation strategies encompass explicit consideration of the cost-effectiveness of the intervention. For example, if we’re providing a summer school, we need to know not only how many students went on it, but also how many students progressed to university, and, most importantly, how many students went to university as a result of the summer school. That is, they would not have progressed to university if they had not gone on that summer school. And we also need to know this for the other initiatives that a young person could be doing.
Until we have a reasonable idea of the true costs of access initiatives, and the true, unique value that they are providing participants, it will be impossible to really get to the bottom of whether we’re helping those we’re working with make the best use of their time, and whether universities are making the best use of the resources at their disposal.
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[i] https://www.bls.gov/opub/mlr/2016/book-review/behavioral-economics.htm
[ii] Or whatever the key outcome is for the initiative, which might be something further up the pipeline such as attainment, or knowledge/interest in university.
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