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What I'm reading #8: Never ignore opportunity costs


By Sam Instone - February 24, 2022

According to researchers at Cornell University, the average adult makes about 35,000 remotely conscious decisions each day.

Apparently, 226 of these are on food alone.

These numbers might sound far fetched and these decisions insignificant...

But each decision carries certain consequences.

Both good and bad.

Every choice we make compounds and affects the journey we're on.  

Also, in making a choice, we give up an alternative choice.

In economics, the choice we didn't make has a cost associated with it.

It is called 'opportunity cost,’.

The cost and benefit not received, of not choosing the next best alternative.

And everything in life has an opportunity cost.

Every time you say ‘yes’ to something, you're also saying ‘no’ to everything else you may have achieved with your time and money.

So, as a rule, you want to choose the option with the lowest opportunity cost.

Let's take an example.

  1. You choose to spend time and money going for a drink after work with colleagues.
  2. The opportunity cost here is NOT spending that time at home with family, and NOT spending the money on something else.
  3. So, if your next best alternative to after-work drinks, is spending time with your family...
  4. Then the opportunity cost of this choice is the money spent, plus the pleasure you forgo by not being with your family.

Economist Russell Roberts wrote,

“To get the most out of life…you have to know what you are giving up in order to get something else…always remember that everything has a cost…sometimes people are very happy holding on to the naïve view that something is free. We don't want to hear about the hidden or non-obvious costs. Thinking about forgone opportunities, the choices we didn't make, can lead to regret. But if you want to get the most out of life, you have to take account of the opportunity cost, the foregone alternatives."

Time is the only non-renewable resource we have. 

So perhaps the importance of time opportunity cost is the most significant.

But this is where we ignore opportunity cost the most.

Roman philosopher Seneca wrote in his book 'On the Shortness of Life',

"How many have plundered your life when you were unaware of your losses; how much you have lost through groundless sorrow, foolish joy, greedy desire, and seductions of society; how little of your own was left to you. You will realize that you are dying prematurely."

Time is money

In a 1748 essay titled 'Advice to a Young Tradesman, Written by an Old One,’ many believe Benjamin Franklin first introduced us to the notion of 'time is money.’

"Remember that time is money. He that can earn ten shillings a day by his labour, and goes abroad, or sits idle one half of that day, though he spends but sixpence during his diversion or idleness, it ought not to be reckoned the only expense; he hath really spent or thrown away five shillings besides."

Unlike money, once spent, time can never be recovered.

When deciding how to spend your time or your money, consider both as different sides of the same metaphorical coin.

Think about the value of your time in creating the money you’re planning to spend, and about the value of the time you’d be saving by spending that money.

When you think about both aspects at the same time, you will likely make better financial and time-management decisions.

Regardless of your circumstances, you define your life through the choices and decisions you make.

Choosing your education, spouse, career, investment, financial planner or people you surround yourself with – is far more important than one that will influence you only today.

Learn to think about opportunity costs and the foregone alternatives.

 

Quotes

"People are frugal in guarding their personal property, but as soon as it comes to squandering time, they are most wasteful of the one thing in which it is right to be too stingy."

- Seneca

 

Further reading

What I'm reading #7: You control much less than you think

Seneca - On The Shortness of Life

How to leave a £1.7 million legacy for your children

What I'm reading #6: Learn to walk away from bad decisions