Understanding Opportunity Cost to Make Better Decisions

Brain fog is a horrible thing to experience: You can’t think straight, you struggle to remember things, you struggle to articulate yourself, your concentration is impaired, and your thought processes are much slower. “My brain just isn’t working today!” Sound Familiar? Brain fog could be the result of a difficult period you’re going through in life. It could be due to trauma you’ve experienced, a bad diet; or an important, but difficult, decision that you’re struggling to make. With the radical shifts our society has gone through over the past couple of years, our brains have been sent into overdrive. Between work from home, the new digital economy, web3 and the upcoming recession, there’s a lot for our brains to process. Because we’ve been ushered into a new technological age, we can’t always rely on wisdom from the past. The uncertainty and ambiguity can leave us with very tough, uncomfortable decisions to make about the future. Having good frameworks for making decisions can make the whole process, not just less debilitating, mentally, but also a lot more effective. A lot of us tend to make big life decisions in a very piecemeal fashion: You juggle different pieces of information, with no clear or coherent process; and you throw in a little advice from people here and there, without any consistent process for determining outcomes. Then eventually you come up with some half-thought, tentative decision that you end up going back on in a few hours. This is why decisions take so long and feel so taxing. Frameworks give you a more consistent, structured process for making decisions, taking away a lot of the mental burden. You don’t have to think as much about how to weigh up options, which principles to use etc, because the frameworks provide that. Decision-making now becomes more about just plugging the information into your frameworks and getting a result. Similar to plugging numbers into a maths equation and observing the answer.

Opportunity Cost Opportunity cost is an excellent framework for helping you to make better decisions. It’s often used in Economics. Economics is based around maximising the allocation of scarce resources. So a lot of the principles can be very useful when applied to your life. When making a decision, opportunity cost is defined as the loss of value that would have come from the next-best option. It might seem obvious, but it’s often missed out. A lot of the time when we chose something we look at direct costs, like how much time, effort, and money something costs. But we don’t consider the value of the option we didn’t choose as a cost. A typical example of opportunity cost in economic theory could be seen in how a financial firm chooses an investment. They would typically look at the ROI, checking how much an investment provides in $$ and how much it costs in $$. They might even take into account the time and labour spent on the investment. But with opportunity cost, you’d also have to factor in value that could have been derived from the next best investment option. An investment that might be profitable when you look at the direct costs, might not make sense when you factor in the opportunity cost. It’s almost impossible to make the best choices without considering intangible factors like opportunity cost because they represent a door of unfulfilled potential. Just because something works, doesn’t mean it’s what we should be doing. Just because we can do something, doesn’t mean we should do it. When there are higher potentials that, deep down, we know we can grasp, it leads to unresolved inner conflicts. These are the type of inner conflicts that don’t seem to have any direct cause but plague us all the same. Opportunity costs aren’t tangible or direct, so it’s easy to ignore them. But, like with many intangible things, they still have an impact on you. Opportunity cost forces us to reevaluate those things we haven’t considered for years. Those inefficient processes, that we shouldn’t be doing anymore, but “still work.” It can help us unlock that hidden extra potential and maximise value in our lives.

Money, Career, University These usually coincide with the more stressful and uncertain decisions Millenials have to make. Most of the time people get settled into positions that they shouldn’t remain in because it’s not catastrophic. You’re okay at what you do, you get paid enough to live, you’re not unhappy per se, and you get on with your colleagues; you’re comfortable(ish) so you stay where you are. You might even be tempted to stay there for years or decades. But with opportunity cost, you need to consider the value of the options you’re forgoing as an actual cost, not just an ethereal “could be” figment of your imagination. You put the majority of your time, effort, and energy into your career. It’s a lot. And there are lots of other things you could be putting your resources into a different job, a business, time with your friends & family, higher education, online courses etc. Of course, a lot of the time, when you weigh up the costs and benefits (including the opportunity cost) it may still be a good idea to stick with what you’re doing. But a lot of the time it isn’t. The technological age we live in has increased the opportunity cost for a lot of the traditional paths people take. In the past, it might have made sense to stay in a job you aren’t fond of, but with WFH opportunities all over the world, and the booming online business industry, the opportunity cost for staying where you are is much higher. In the past going to University to study management or business, might have made sense. But again, in 2022 where you can watch almost any University lecture online and there are hundreds of thousands of online courses, it might not make as much sense. The same goes for business. You might be selling a product that makes a profit, in an industry that works, but that doesn’t necessarily mean you should continue doing so. There may be new alternatives with better long-term potential in alignment with changing trends. You don’t need to wait until something isn’t working to pivot and make a different decision.

Relationships/Socialising This one’s a bit weird because you wouldn’t normally think about opportunity costs when it comes to your relationships. It might seem a little robotic to apply this principle to your social life. But the use of opportunity cost can improve your relationships in the long term. A lot of the time people (myself included) stay in friendships and relationships because of history, comfort, and familiarity, even when we clearly don’t get on with the person like we used to. We change as we get older, but you might still find yourself doing things you’ve outgrown because you want to hold on to certain friendships. It’s easy to miss the opportunity cost here, but just like with everything else, relationships and friendships take time effort and lots of other mental resources. When we were children, the opportunity cost of spending time with people wasn’t as high because we didn’t have much else to do. So you spent a lot of time exploring different relationships. As adults, we have to be a lot more selective about who we spend our time with because we have more obligations and our time is more limited. We have career aspirations, rent and bills, family obligations etc. Often in College and University, you get dragged into group events that are fun but might not be your first choice. You sacrifice some of your individuality so that you can engage in group activities. You spend time in groups with people you get on with, but also with people that, again, probably wouldn’t be first on your list. Unfortunately, old habits die hard. Although we grow up, we carry that same redundant programming for social engagement into our adult lives. You might find yourself in a situation where seeing certain people becomes a tick box situation. Rather than being excited to meet up, it becomes a chore that you’re ticking off. This is especially true if you’re into growth and personal development because the opportunity cost of your time is much higher. Realising the value of your time, and being more selective with what you do and who you do it with, is very important.

FOMO When it comes to opportunity cost, it’s important not to be pedantic. You don’t want to end up being so obsessed, that you’re always looking at alternative options, even when you’re in a good situation. This can lead to FOMO. Like with all things, if you abuse this principle, it will become counterproductive and unhealthy. But when used in the correct situations, it’s a great framework for helping you make the most of what you have.

Reference: Original link