5 Valuable Things You Should Know About Opportunity Cost

We make many decisions every day and our criteria for making them often vary depending on our current priorities.

Sometimes the decisions we need to make can be simple or obvious, whereas as other times, there many be a number of factors we have to take into account before we can make an intelligent decision.

One factor that can helps us choose our priorities better or make decisions that will serve us, both in the short and long term, is by considering opportunity costs.

What is Opportunity Cost?

Opportunity cost is also referred to as competing interests. It’s the cost of giving up an alternate activity while a person engages in a current activity. It’s the comparison of the value of one activity against another.

Using a typical everyday example, say a person has the choice of either spending two hours of an evening watching television or spending that time learning a new skill that will help them in the future. The opportunity cost of watching television may be deemed to be high by the person compared to the future benefits of acquiring a new skill.

In that case, because the opportunity cost of watching television is higher than learning the new skill, it’s very likely the person will choose to invest that time learning the new skill.

Sometimes opportunity cost is determined by a sense of loss. A person may imagine, by doing a particular activity, they may lose something else in the meantime.

Knowing how to use opportunity cost better can speed up our decision-making process and also reduce the amount of mental energy used when evaluating options prior to making decisions.

Dealing with opportunity cost

Recently, I had a decision to make whether to renew my membership in a networking group I was part of for another year or not. In the months leading up to the end of my membership, I calculated that it was costing me about six hours on a particular day, every week. Basically I was losing a good part of a working day every week.

Multiplied out over a month, it equated to at least twenty-fours that it was costing me to be a member of the group. During those twenty-four hours, I was not building any assets for my business or creating new value that I could offer, so the opportunity cost for me was quite high.

Once I evaluated it against other factors such as my financial return on investment and potential long-term strategic partnerships, it was an easy decision to not renew my membership. As a result of that decision, new opportunities have opened up, which were not available to me previously because I was not available on that specific day each week.

5 Things to be Aware of About Opportunity Cost

  1. Time is just one consideration. While we can never earn back more time, there are situations where time should not be the only factor in evaluating opportunity costs. Sometimes there are intangible benefits such as mental stimulation, human connection or psychic rewards that can play a factor when trying to make an intelligent decision.
  2. Give up either/or thinking. We can fall into the trap of thinking that if we choose to do one thing, we may not be able to do something else. For example, if we choose to follow a dream of ours, we may have to sacrifice spending time with our families in the evenings or weekends. We can always begin and gain momentum towards a dream or goal without taking anything else away from our lives.
  3. Avoid making short term decisions. Sometimes because of perceived opportunity costs, we can make decisions based on short-term thinking or short-term benefits. We have to realise that there may be short-term opportunity costs but if we want to go to a new level of achievement, we may have to make short-term sacrifices in order to win in the long-term. We should not make short-term decisions based on what we think is possible for us right now.
  4. Get out of what’s not working faster. If we’ve made a decision based on an opportunity cost and it turns out that it was not the best decision for us, we should stop putting up with the consequences of that decision. We can always make a new choice. An example may include enrolling in a course that’s not giving us the benefit we thought it would. Rather than continue with the course, if we’ve decided the course has no future benefit, then we should quit the course.
  5. Use transitions better. Similar to giving up either/or thinking, there will be times when there is an opportunity cost that cannot be avoided. Rather than choosing one thing over another, we can reprioritise so that both options are still possible. For example, we can choose to dedicate four hours a week to a dream or new goal, while still having time for our family or for our other priorities. We can always re-evaluate what we’re doing and how we’re doing things in order to make it possible to get started on a new opportunity.

Factoring in opportunity cost is a powerful way to make intelligent decisions especially if we have many opportunities or have many responsibilities in life. Once we start to use opportunity costs to our advantage, we’ll make better decisions faster and attract more opportunities to create a better life.

Action Step: Next time you have to choose one thing over another, factor in the opportunity costs involved and how you can use the ideas above to make the best decision.

Question: What is another consideration about opportunity cost that can help us make better decisions?

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