Opportunity Cost is Everything

Hello friends, and welcome to The Daily Preneur! If you want to join 171 other readers learning about preneurship and economics, subscribe below:

You can check out our other articles and follow us on Twitter.

For those who don't know, I will be starting my Master's program later this month. I'm studying Economics. I'm freaking pumped. In light of that news, we're talking about opportunity cost today.

Opportunity cost is the value of what you lose when choosing between two or more options. It's a basic principle in economics. More simply, it's the loss you take to make a gain or the loss of one gain for another gain.

I'm not asking you to become an economist, but thinking about opportunity cost may help you decipher what matters in your life. After all, the field of economics exists to understand how humans make decisions. When deciding which grad school to pursue, I wrote about how my life may play out at each school I got into. In other words, I was comparing the outcomes of each decision. Or the potential gains.

You can do this exercise for anything – big-life decisions like attending grad school or smaller-scale choices like what to wear today. To the latter, if it's raining outside and you're choosing what to wear, most people would opt for wearing pants. But what you're losing by choosing to wear pants is the opportunity to be called a freak for wearing shorts by your friends and co-workers. It's all about trade-offs.

If it hasn't become clear, thinking about opportunity cost is simply the act of considering alternate outcomes. This is important for many reasons.

First, if you're unsure which path is optimal, considering different outcomes and comparing their gains is a great way to decipher the best path forward, like what I did for grad school.

Secondly, if you're attempting to make a wise financial decision, like buying or leasing a car, you can think about personal finances in terms of opportunity cost. What are you losing by leasing the car? What are you gaining by buying the car outright? What do you gain by not buying the car at all?

Lastly, opportunity cost is a useful mental model for navigating a world that constantly pulls your attention in multiple directions. What's the cost of logging onto Tik Tok and mindlessly scrolling? What could you be doing with your time instead? What is that time worth?

If you spent 45 minutes watching YouTube, what's the dollar figure associated with that quantity of time? If you're a doctor, it's north of $100. The economist would say that you're missing out on a potential gain of $100 to watch 45 minutes of Tik Tok. Again, trade-offs.

I'm not claiming that working instead of watching Tik Tok is the best use of your time. Maybe it's 5 pm, you're off the clock, and it's time to relax. That's cool too. Opportunity cost is how economists explain how humans make decisions. It doesn't take into consideration what is inherently right or wrong.

But, thinking about opportunity cost can clarify your wants and needs, help you compare two or more potential outcomes, and navigate the world with more confidence and competence.

Keep crushing.

Cheers,

Noah Cracknell

P.S. Mr. Ross, if you're reading this, thank you for being awesome and introducing me to the field of economics.

Keep reading