When you opt for Cake against Ice-cream, you have sacrificed the experience of eating ice cream. When you opt for Watching TV over outing, you have sacrificed an enjoyable outing experience.
Every day and in several matters, we choose one over the other choice. The choice we sacrifice in favour of the choice we make is the opportunity lost. This is why it is called Opportunity cost.
This is an important economic concept. We daily use the concept without our knowledge.
Every choice we make has an opportunity cost. To get the most out of life, we have to think like an economist. You have to know what you’re giving up to get something else
“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities.” Charlie Munger, Investor
Education
What to study in life? Science or Medicine or college drop out?
Where to study for your degrees? IIT or Stanford or online?
If you decide to drop out to earn money, your opportunity cost is foregoing potential to earn more after completing a higher degree.
Job
Whether to do a job or do freelancing?
Whether to choose promotion age get transferred or avoiding transfer by declining promotion?
Marrying
Whether to marry? The opportunity cost if marring is giving up the freedom of bachelor life. The opportunity cost of not marrying is not having the benefits of family life.
Whom to marry? Girl /Boy A vs Girl/Boy B.
There is an opportunity cost of marrying an educated candidate vs deciding only on the basis of looks.
Investing
Whether to invest in fixed income risk-free investing or invest in equity?
Whether to invest in script A vs investing in script B?
Whether to invest in the life insurance or mutual fund?
The government also, take several decisions on the basis of this concept. When the resources are limited, whether to go for a bullet train project or set up 200 mega schools and hospitals?
“In economics, one of the most important concepts is ‘opportunity cost’ – the idea that once you spend your money on something, you can’t spend it again on something else.” Malcolm Turnbull
Unlike financial costs, these opportunity costs do not reflect on a company balance sheet, but while analysing the company performance in the hindsight, they do play an important role. This is why companies and investors do a scenario analysis of all available options to decide the cost-benefit analysis of any decisions they make. This cost includes the actual cost and also the opportunity cost.
Everything we do is at the cost of every other thing we could have done but opted not to do. Everything in life is about opportunity costs. Every time you say “yes” to a choice, you are also saying “no” to everything else you may have accomplished with your time, money, and resources.
When choices are many and resources including time are limited, the concept of opportunity cost plays an important role in our decision-making process.
This should not make you indecisive. Do not become paranoid about it. Keep this in mind while making a decision. It need not be 100% best decision in all cases.
On the Independence Day holiday, I am writing this post at the cost of watching a movie. Now you know the role opportunity cost plays in our life. This will help you in better decision making.
“Intelligent people make decisions based on opportunity costs.” Charlie Munger
India Financial Literacy 