Opportunity Cost: Value Gained Is Value Lost

In economics, the opportunity cost is the value of the best possible alternative forgone. Whatever choice we make, we pay the price of not having chosen any other available alternative. Saying “yes” to one thing means saying “no” to a zillion other things. The opportunity cost is the relationship between scarcity and choice, since the aim of economics is to make efficient use of limited resources. Opportunity cost encompasses all the costs of a decision, the explicit and implicit: productivity, output, lost time, pleasure, money, or any other benefit.

Put another way, while it is possible to do anything, it is not possible to do everything. Choosing one thing means you can’t do other things. “Other things” in this context, are “opportunities”. The “cost” is the inability to do “other things” by choosing “one thing”. Say you are considering studying. Your opportunity costs are: the salary you would earn if you worked instead; the business you could start with the money you spend on your studies; the income you could earn from investing this same money; and all the other potentially beneficial alternative paths you could take. Another instance is spending your money: buy one thing, and you cannot purchase something else.

When you boil it down, every decision carries an opportunity cost. This isn’t so bad for inconsequential matters, but it’s worthwhile to consider when the stakes are high. You and I make errors and the “other things” can be more valuable than we think. By stopping and thinking through all the options, you can stumble upon a better use of your precious, limited resources. The more successful you become, the more responsibility your decisions carry, thus the more opportunity cost as well. As Uncle Ben said, “With great power comes great responsibility.” This is because the value of your time increases, meaning you should spend it on activities where you have the most leverage.

In simple terms, deciding on something is deciding not to embark on everything else. It’s one of the principles behind why it’s a great idea to accept responsibility for your actions. The hand you are dealt is not what matters. What does is how you play the game, how you choose your opportunities afterward. Because our time, money, and energy are limited, you have to miss out on some things to indulge in others. That’s life. Make decisions in balance of costs and benefits—maximize returns on your investments and prioritize what really matters. “The cost of anything is the amount of life you exchange for it.” said Henry David Thoreau. Read that again.

The model of opportunity cost is among the most important ones you will come across and apply. This is because it permeates every thought, decision, and action that you embark on. Everything has a cost. Even thinking one idea comes at the cost of another. Who you are now came at the cost of who you could have been. Are you who you want to be?

That question is harder than it seems. You have to take into account that everything demands sacrifice. Perhaps you see yourself as a successful entrepreneur. A person with a good understanding of risk, great leadership skills, and innovative ideas. Somebody physically fit and healthy, who rarely gets sick and has energy to spare, with a plentiful understanding of nutrition and fitness. What would it take to become and be that person? Years of hard work and time away from family and friends to build the business. The stress of having to take up every role as a small business owner, the discomfort of unmet expectations, the… Is it really worth it? Life is a series of trade-offs. Don’t be fooled by the external appearances of one’s life. Some people’s success cost them more than they would ever pay in hindsight.

Real life implications of opportunity cost:

• Tech startups: a startup has to decide how to allocate limited funding and human resources, choosing between, say, marketing or product development: the cost of marketing is that delayed improvements could increase long-term user retention, the cost of product development is that you would have fewer immediate users and slower growth;

• Parenting: should parents work overtime for extra income or spend the time with their kids?: the cost of overtime is missed milestones and bonding moments with kids, the cost of family time is reduced financial security and/or career advancement;

• Environment: should government funds go towards renewable energy or infrastructure for disease resilience?: the cost of renewables is reduced preparedness for current climate risks, the cost of infrastructure is a delayed transition to sustainable energy;

• Personal: should you save for retirement or take an expensive vacation?: the cost of saving is missing out on a memorable experience, the cost of vacation is reduced retirement funds and financial independence;

• Career: should you take a high-paying job with longer hours or a lower-paying role with better work-life balance?: the cost of the high-paying job is less time for family and hobbies, the cost of the lower-paying job is financial security and/or faster career development;

• Day-to-day: should you eat out or cook at home?: the cost of eating out is higher cost and less control over ingredients, the cost of cooking is time and effort to prepare the meal.

How you might employ opportunity cost as a thinking tool: (1) clarify the objective, determining what you value most—financial security, leisure, personal growth, relationships—to make trade-offs more apparent; (2) list out the alternatives available to you and their potential upsides and downsides; (3) whenever possible, quantify the costs by assigning a monetary or qualitative value to them—even intangibles like happiness and satisfaction can be ranked; (4) prioritize long-term gains over short-term gratification to stymie your natural proclivity to focus on immediate rewards; (5) revisit and reassess whether you made the right choice to refine your judgment of opportunity costs in the future.

Thought-provoking insights. “The cost of something is what you give up to get it.” this is the core of the principle, emphasizing the trade-offs present in every decision. “Time is the most valuable resource—once spent, it cannot be regained.” underlines how crucial managing time and setting priorities is. “You can do anything, but not everything.” a legendary quote by David Allen, reminding us that every decision inherently excludes other possibilities. By exploiting opportunity cost, you can navigate your decisions with more clarity. Everything is a trade-off. Effectively allocating resources will keep you from unnecessary regrets. Aim for every choice to add value.