Opportunity Cost

Opportunity cost is the cost of passing up the next best alternative when making a decision. Economics textbooks often cover opportunity “cost” in terms of time and money, but I’m going to discuss it in broader terms to include fulfillment and satisfaction.

For example, if you play video games for three hours, the opportunity cost of that choice is the money you could have earned by working instead, or the enjoyment you could have received from an alternate activity such as biking in the park.

Busy people often have to turn down offers and requests because the opportunity cost of accepting is high. Donald Trump would probably turn down a speaking engagement that paid him a mere $10,000. It isn’t worth his time to accept. He has many better alternatives to choose from, including much more lucrative speaking engagements.

Opportunity cost is easy to understand when you’re choosing between a few clearly defined alternatives, and the payoff from each alternative is obvious. If you’re choosing between a few different options for what to do on Saturday night, or how to spend $500, it’s relatively easy to predict the probable outcomes of the various options, and choose the one that feels the best.

But most of the time, the true opportunity costs of our choices aren’t obvious. There are an infinite number of possibilities for what we could do with our time and money, most of which we never think of. Only in hindsight is it clear what our other options were – and by then it’s too late to reverse history.

We also have ingrained habits and ways of thinking that program us behaving according to certain patterns. Some people are home-bodies and spend most of their leisure time at home. Some people keep themselves busy with a razor sharp focus on their work, constantly working on one project or another to try to get ahead. Others are persistent penny-pinchers, always looking to save a few dollars here and there, spending a lot of their time browsing the internet for coupons and deals.

These habits often serve us well because they align with many of our preferences and desires. Habits also cut out the need to constantly think about what we want to do, and put our behavior and choices on auto-pilot. But they also have potentially high opportunity costs, causing us to miss desirable new experiences and opportunities.

If I could go back in time, I would choose to do some globe-trotting during the summer between graduate school and starting my first day job, instead of spending it tutoring and working on yet another research project. The thought of traveling never crossed my mind until my friends later told me what a great time they had on the other side of the world while I was working in an office.

My habitual way of thinking, centered around being productive and earning income, caused me to miss a terrific window of opportunity to travel while young and free of career and family responsibility.

Everything we do has an opportunity cost – there’s always an alternative use of our time and money. It’s as unavoidable as breathing or aging. You might think that the goal in life, therefore, is to minimize the opportunity cost of our actions by always choosing the best possible alternative at all times.

The truth is, we don’t have crystal clear foresight, and it’s impossible to always know beforehand whether we’re making the best possible choices. Even if we could see the consequences of any possible choice beforehand, it would still be overwhelming to have so many choices to consider.

Still, ignoring the consequences of our choices is likely to lead to regret, and wishing we’d done things differently.

Fortunately, there’s a much simpler way to go about your life while making sure you don’t miss out on the important opportunities to expand your horizons and have fulfilling experiences.

If you agree that the purpose of your life includes growth, the expansion of your consciousness through a variety of experiences, and building positive relationships with others, then we can define opportunity cost as follows:

Opportunity cost is the value, in terms of new experience, personal growth, and connection with others, that we miss out on by choosing one alternative over another.

This leads to our next logical conclusion – that the best choices in life, in other words, those with the lowest opportunity cost – share the following characteristics:

• They require some degree of courage and going outside of your comfort zone
• They are new experiences that contrast from your normal routine
• They involve connection with other people

It may well be impossible to always choose the best alternative, but by following these rules of thumb, you will usually make a good, if not very good or the best, choice:

1. Choose a new experience over something you’ve done a million times.

If you’re a home-body who spends 9 out of 10 evenings at home watching TV, and you hear that there’s a local street festival going on, then get out to the street festival. By staying home, you’re missing out on new experiences and opportunities to connect with new people. In this case, going out probably has the lower opportunity cost, because it’s a novel experience, and the next best alternative is staying in and watching TV – something you do quite frequently anyways.

Generally speaking, the opportunity cost of missing out on a regular routine in your leisure time is quite low.

2. Pay attention to what your peers are doing.

The idea of traveling abroad after grad school isn’t something that would have just come to me. I found out I missed that opportunity after the fact from my peers. If you don’t want to miss out on the best opportunities out there, then pay attention to what your friends and peers are doing. That doesn’t mean that you should become a follower, but that you should keep track of what others are doing and consider whether a similar experience would be desirable for you.

If you don’t have many friends or peers whom you’re connected with, then for you, getting connected with others is an action step in its own right. 

3. Ask yourself, “If I had all the freedom in the world, what would I choose to do?”

We tend to be boxed in by our own habitual ways of thinking, instead of considering all the various possibilities of things we could do. To break free of habitual thinking, just ask yourself the simple question, “If I had all the freedom in the world, what would I choose to do?” Let yourself daydream about all the experiences you’d like to enjoy this lifetime. Perhaps you’d like to climb Mount Everest, or go on a journey through the Amazon. Maybe you’d like to train as a chef in New York City, or learn to speak Mandarin.

The things that you come up with are guideposts as to the types of experiences you should strive for. Don’t worry if what you’re daydreaming about isn’t realistic. It may take you some practice to be able to daydream in the first place – most of us aren’t used to doing it.

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As you go about living your life, stop occasionally to ask yourself, “What’s the opportunity cost of the choices I’m making? Am I foregoing better experiences by sticking with my usual routine?” Try new experiences, push yourself out of your normal routine, and allow yourself to daydream. Live in a way that when you look back in 5, 10 or 20 years, you’ll be proud of yourself