The Famous Opportunity Cost

forkintheroad Opportunity Cost The Famous Opportunity Cost Forkintheroad

We all instinctively understand there are tradeoffs in our decisions. Choosing one thing means we can’t choose another. “You can’t have your cake and eat it, too.” In economics, this concept is explained as the opportunity cost. If you haven’t heard of the theory before, an opportunity cost—according to wikipedia—is “the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives.” In simpler terms, it is the value of the next best opportunity.

For example, assume you’re considering attending graduate school. In your decision to go, you’re likely to analyze the decisions in terms of the thousands of dollars in price and the investment of your precious time. However, this is only half of the equation. You are also losing out on the income that you’d obtain working elsewhere. You’re also losing out on the work experience and career moves you’d make in place of graduate school. I’m not advocating on necessarily skipping college or graduate school per se, but it is important to understand the real costs involved. In fact, I’m 90% of the time in favor of obtaining more education.

Read Jeff Ronne's answer to Is college/university really worth it? on Quora

For a lighter example, there is a fantastic tool for calculating the opportunity cost of spending small amounts of money over long periods of time. Adding up the money you could spend on a few muffins every week over a long period of time will show you how small habits can add up. I think a more applicable name could be the Starbucks Calculator.

In all of these examples, one area is hard to quantify. The opportunity cost of the energy lost in deciding on which decision to make. Knowing that we have two mutually exclusive choices doesn’t help much in the decision making process if your anxiety about which choice to make leads to indecision. We always have a conflict in choosing where to allocate our time and money. That will never change. What can change is the stopping the constant assessment in our heads of “where we’d rather be” or “what we’d rather be doing.”