Opportunity Cost

At what price do you do the things you do? Could you be engaged in something that is better paying, more fulfilling, or more rewarding?  What is your opportunity cost?

What is opportunity cost?

According to Lara Hoffmanns, author of Plan Your Prosperity, in Forbes article The Risk of Ignoring Opportunity Cost:

“Opportunity cost is the risk of making decisions now that result in lower returns over the longer term than you would have gotten otherwise. “

This certainly applies to finances and investments, but it also applies to life in general.

For years, I refused to volunteer my time, considering it was too valuable to give away when I could be doing something to earn money, better myself or help my own family. In this case, I realized that there was an opportunity cost if I volunteered to use my time in ways that earn money or directly benefit my family. However, I probably also lost some opportunities – for a fuller life, to teach my children lessons and to make some potentially mind blowing contacts.

Yet in that same time frame, I also refused to pay someone else to do anything I could do myself – from yard work to house work to cooking, shopping and doing home maintenance. I never stopped to determine what the opportunity cost of doing things myself was. Early on, we couldn’t really afford to hire someone else to do the work, so it made sense. However, after we had some money, I could have used that time to find a way to establish a stream of passive income – taking a short term hit on savings to gain a potentially bigger reward down the line.

Ways you may be considering opportunity costs.

You may be considering opportunity costs when you do comparison shopping to decide which product to buy.

Shane Frederick in The Persuasive Power of Opportunity Costs points out that even if we, as consumers, consider the opportunity cost of buying one item over another, there are ways that marketers can influence our decision making:

“A widely accepted precept in research on decision making is people’s passive acceptance of the “frame,” or characterization of the problem, they’re provided. This confers power on those who offer a frame. Decisions about whether some expenditure is “worth it” hinge on what the purchase is seen as displacing. Take the extra time to define that, and you can change the way your customers view your value proposition.”

You may be considering opportunity costs when you decide to start a business instead of taking a job.

If you spend your working days as an employee, you will have much less time to develop your own product – an invention that could be the next hot item, a book that might be the next best seller.

You may be considering opportunity costs when you decide to study instead of practice a sport.

Even though you are the star of the high school football team, and might become a pro with more practice, you decide to study hard to make the grade to ensure entrance to the job market or college.

You may be considering opportunity costs when you decide to have a baby now rather than wait 5 more years.

Each and every time you make a decision, or even refuse to decide, there will be a cost related to the path not taken, the choice not made.

We never know ahead of time, what the outcome will be. All we can do is gather the facts, evaluate them, talk it out and determine which choice to take and then work like hell to make that choice work for us.

We can, however, and certainly should, take time to look at that next best decision, to see if the opportunity we are passing up is one that we shouldn’t. Don’t make the choice and then later on down the road, keep kicking yourself for not doing something else! Do learn from that decision and use what you learn when you are making the next one.

I’ve often said that folks who get ahead in life, especially financially, tend to make more good decisions than bad consistently over time.

So how do you make a good decision?

Ideas from Oprah and the Business Insider  list the following:

• Don’t spend excessive amounts of time researching the ‘Best’ option. Also don’t blindly trust the data you find, be a bit of a skeptic. There often is no ‘best’ option, just the one that makes most sense to you.
• Weed out the little guys and keep the big ideas
• Set standards to help eliminate choices – list out what you want and ignore the extra frills.
• Identify your goal – rudderless decision making will cause you to wobble around!
• Don’t make decisions when you are sick, stressed, hungry or tired – let your subconscious have time to connect and don’t let your body interfere.
• Assign probabilities to outcomes from the decision. It will help you get better at making them. If I make this choice, I have x chance of realizing abc.
• Rein in your fear of losing – we are hard wired to fear losing more than enjoy winning.

Have you paid the price of an opportunity cost?  Care to share?