In decision making, opportunity cost is the difference between the net value of the path which was chosen and the net value of the best alternative which was not chosen. I have framed my entire life around this principle. Opportunity cost is not just something you learn in an economics class, it’s a way of life – for me, at least.
When people ask me what motivates me, or why I do some of the things I do, my answer is always opportunity cost. It’s a bit of an unusual answer, and a little odd to explain, but I think it makes perfect logical sense. For example: “The net value of one path” might be waking up to go to class, and the “net value of the best alternative path” might be sleeping. Every hour of every day, I use the idea of opportunity cost to lead my decision making process. The opportunity cost associated with not going to class is too high; therefore, the logical choice is to wake up and get going.
Framing the world in terms of opportunity cost has its advantages and disadvantages. One advantage is that it brings a formula to your life. That might sound like a disadvantage to some people, but for me, in a world where I feel there is little I can control, this decision making method brings some rhyme and reason to both the simplest and most complex issues.
Another possible advantage is that using opportunity cost takes a lot of emotion out of decision making. Again, this may be a disadvantage to other people, but it’s much easier to defend a decision to which you’ve arrived by logic than by emotion, and the outcomes are generally more favorable and predictable.
I guess this method is, at its core, a risk management tool for your life, just as it is for business. We each make thousands of decisions every day, some meaningless and some pivotal. College is a defining time for many of us to decide what we want out of our lives, and more importantly, a time for us to determine how to even arrive at those conclusions. Opportunity cost is a method I have adopted to help me make decisions by weighing the pros and cons of each alternative. I think that many people perform this analysis naturally, but when you give it a name, you give it power.
So, next time you have a decision ahead of you, try framing it in terms of opportunity cost. Sometimes, the most difficult decisions you’ll make all day may seem inconsequential at first. For me, getting up on a Monday morning to go to class and write this blog for all of you was pretty tough, ’cause I was pretty cozy in my “best alternative path,” but the cost of staying in bed is too high to waste an opportunity to join the rest of the world.
Don’t forget to check out my VIDEO TIP OF THE WEEK for this post.