Opportunity cost

by Admin
Updated: July 11, 2018

Opportunity costs that do not relate directly to money can be difficult to quantify

Given the choice between two things that benefit you, the opportunity cost of choosing one over the other is the value of the one you had to give up, i.e. the cost of the lost opportunity. It never appears in the accounts so how useful is it?

If you are offered something worth $100 as a gift, it is worth $100 to you, i.e. if you accept it, your net worth will increase by $100.

If you are asked to choose between two gifts, one worth $100 and the other worth $80, the opportunity cost of accepting the $100 gift is $80, the value of the lost opportunity. Your net worth will still increase by $100 but now you have the idea that it somehow only benefits you $20.

Opportunity cost applies to what is lost

If you are presented with two choices and choosing one does not mean you can’t have the other later then the opportunity cost applies only to the delay.

If I choose $100 now and get $80 a month later, my opportunity cost relates only to my inability to invest that extra $80 for a month.

Wait, isn’t this just greed?

Basically, yes. The only way to have zero opportunity cost is to own everything.

Actually, no. Most people make bad decisions because they don’t run the numbers and they assign value incorrectly...

$80 and leave now, or $100 provided I do 10 shots plus Karaoke in Kabuki make-up and the video gets uploaded. Woohoo!

Opportunity cost depends on value

In order to calculate the opportunity cost, you have to put a dollar value on everything. However, perceived value is subjective.

If I can have $80 in 4 crisp $20s or $100 in gnarly old pennies and I prefer the $80. My preference must be worth at least $20... do you agree?

Only the second-best choice counts

If you are presented with more than one choice, only the next best option is treated as the opportunity cost because you can only ever choose between one option and another.

If the choice is between option #1 and everything else, everything else is simply option #2.

It’s a fancy name for making a good decision

I think I’ve always considered intangibles when making decisions, but since this has a name I have to take extra care. That’s good.

The opportunity cost of making coffee at home vs swinging by Starbucks is easy to quantify financially. The value of being in with the group when they’re discussing the latest Starbucks offering is not easy to quantify financially.

More info

Opportunity cost defined and described - including non-monetary costs - at referenceforbusiness.com.

“Economics 101: How to Calculate Opportunity Cost” at listenmoneymatters.com - does not include calculations (because it’s subjective), but does include hoppy audio [Language warning!].

There is no formula to calculate opportunity cost because of the arbitrary nature of assigning monetary values to concepts.

Internal links

A new car can be good for you Compromise No regrets Humor All articles
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