Friday, 16 March 2012

Opportunity Costs

This is another idea I gleaned from the MBA Monday posts from A VC via Daily Lit. 

It was about Opportunity Cost, defined as the cost of not being able to do something because you are already doing something else. He gives a business example based on a commitment to building a product that ties up staff who are then unable to respond to a better deal that comes along. This struck me because he quotes Gretchen Rubin, whose Happiness Project blog I read daily. She said,

I also try to ignore opportunity costs. I can become paralyzed if I think that way too much. Someone once told me, of my alma mater, “The curse of Yale Law School is to die with your options open” meaning, if you try to preserve every opportunity, you can’t move forward.

I got this graphic from Wikipedia, but my preferred picture would have
been this one.

I'm thinking I don't properly understand this concept, because it does seem to me that there are many applications of this principle for me, worth giving attention when making choices about my three limited resources: time, money & energy.
  • If I spend all my money on fun stuff, I may have lost the capacity to pay an unexpected bill.
  • If I spend all my time reading blogs, I may have lost the daylight to go for a run.
  • If I go for a very long run, I have to accept that I will likely not have much energy left for much else (at least until long runs are normal again).
Of course, these are all about things in the future that are easily foreseeable.  The unspoken part of the definition of opportunity costs seems to be about things one could never predict would come along, for example, never marrying because a 'better one' might be around the corner, which I think is a great example of Gretchen's idea of never being able to move forward.

I think the opportunity cost concept is looming larger for me of late because of getting older. I'm conscious that there will likely come a time when Bill and I are not up for long haul travel. I'm saving cruises for then, I think, where everything is done for you; assuming, of course, that we will still be able to afford them.

Do you find yourself using or ignoring the concept of "Opportunity Cost" in your everyday life?


Beryl said...

With clear priorities, and a good grasp on trade-offs, oportunity costs aren't that big an issue. Most of what I'm doing is already my first choice. I just don't worry about something better coming along that I'm unable to avail myself of. If I had shareholders to keep happy, this would be a whole different discussion.

Anonymous said...

You have just pinpointed the very thing I am struggling with about retirement. If I retire next year, we can afford it, but we could not afford to travel as I want to do. We I try to discuss this with my husband, he simply wants me at home to enjoy his idea of retirement. I tell him we are creating the degree of choice we'll have for the remainder of our lives. And I'm paralyzed!