Opportunity Cost

There is a concept that gets thrown around in economics classes called opportunity cost.  In that context, opportunity cost is simply the fact of life that if you invest in one thing, you are necessarily no longer able to use those resources to invest in another.  If you put ten thousand dollars into buying a car, that’s ten thousand dollars that you can’t use for the down payment on a house.  If you invest 30% of your salary each month in your retirement accounts, that’s 30% that you can’t use now to go on vacation.  A fairly simple concept, really, and it rarely is discussed outside of economics classrooms.

That’s a shame, because the core concept of opportunity cost – that using finite resources for one thing necessarily deprives them from everything else – is applicable to almost every decision we ever make.  Aside from how we choose to spend our money, opportunity cost is a lens through which to examine how we allocate our time, what we decide to eat, which tool we decide to use, with whom we decide to have dinner…it is difficult to think of a decision that cannot be analyzed through the lens of opportunity cost.  We are finite creatures, with finite resources, existing for a finite period of time, and so every decision we make involves an allocation of a finite quantity to one thing at the expense of everything else.

Since I learned about opportunity cost, I’ve incorporated it into my thought process on each decision I make.  Should I eat out, or in?  If I decide to eat out, then the opportunity cost is the extra money I will spend and the missed opportunity to cook a quiet dinner at home.  Then I have to decide at which restaurant to eat, and the opportunity cost for whichever one I pick will be not eating at all of the other restaurants.  Or my writing: if I choose to invest my writing time on Blood Magic, that’s writing time that I’m not investing in Fo’Fonas or The Legend of Thorskgold the Bold.  When I choose a book to read, it is at the expense of all of the others I might want to read.  Yes, I can eventually get to those other books, but not right then, and things could change: the book could go out of print, or I could have less reading time.  There is an opportunity cost to everything we do.

The tricky part is identifying the opportunity cost in these more nebulous decisions, especially over the long term.  It’s relatively easy to see the immediate opportunity cost of buying this instead of that, but what about down the road?  We can’t know the full opportunity cost of our decisions with great certitude, because we cannot know the future.  The immediate opportunity cost of investing in company A over company B is just the amount of money you’re investing, but in fifty years when company A’s stock has risen five percent and company B’s has risen five hundred percent, that opportunity cost looks very different.  I call this the notional opportunity cost, and when we make our decisions in the present, it is a quantity at which we can only guess.

This is not so much an answer to how to make decisions, as it is a lens through which to view them.  One of many lenses, really: when I make decisions, I’ll think about opportunity costs, I’ll use decision matrices, I’ll look and pros and cons, I’ll look at short and long term impacts…there are many, many different ways to examine decisions before you make them, and using multiple makes it more likely that you will make a decision that is best for you in the long term.  This application of opportunity cost as a concept is also a good reminder that just because we learn a given concept in association with a particular topic, subject, or field, it does not need to remain exclusively the province of that origin.  Whether it’s an engineering concept applied to writing, a writing concept applied to mathematics, or an economics concept applied to personal decision making, the opportunity cost of not maintaining an open mind can be very high indeed.