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Opportunity Cost: What It Is and How to Account for It

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https://effectiviology.com/opportunity-cost/

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Opportunity Cost: What It Is and How to Account for It
Opportunity cost is the value of the best alternative that you miss out on as a result of choosing a different option. For example, if a person chose to invest in a certain venture, their opportunity cost is the money they could have made by investing in a different venture, and namely in the best alternative venture that was available to them.

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Opportunity Cost

It is the estimated value of the best alternative or the best option that one misses out as a consequence of picking one particular option.

Example: Spending a limited resource, lik...

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Opportunity Cost in Non-financial Situations

Opportunity cost in non-financial situations is more difficult to quantify. The loss or gain with choosing an option while foregoing another can be subjective and not readily comparable.

E...

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Calculating Opportunity Cost

The way to calculate the opportunity cost is to subtract the value of the option from the value of the alternative that is foregone.

Opportunity Cost = Return on the best foregone al...

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Importance and Risks

Opportunity cost calculation is essential to individuals, corporations and governments, where there are decisions to be made regarding limited resources like time, money and effort. Choosing...

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Opportunity Cost Calculations

Many people and organizations fail to take into account the various opportunity costs.

  • We need to actively question ourselves about the alternatives that may be missed out by decidin...

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Overestimating Opportunity Cost

Certain external constraints make us overestimate the opportunity cost, as we start to imagine all the foregone options as a missed opportunity and start to see the situation irrationally. This can...

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SIMILAR ARTICLES & IDEAS:

The decoy effect

The decoy effect

It happens when consumers change their preference between two options when presented with a third option, or decoy.

The decoy is priced to make one of the other options much more attra...

How decoys work

When consumers are faced with many alternatives, they often experience choice overload that increases anxiety and hinders decision-making.

Consumers try to reduce this anxiety by selecting only a couple of criteria (say price and quantity) to determine the best value for money.

A decoy steers you in a particular direction while giving you the impression that you are making a rational, informed choice.

Decoy example in the market

Consider the price of drinks at a well-known juice bar: a small (350 ml) size costs $6.10; the medium (450 ml) $7.10; and the large (610 ml) $7.50. The medium is a slightly better value than the small, and the large better still. The medium is designed to be the decoy, steering you to see the biggest drink as the best value for money.

If you buy the biggest, was it because you made a sensible choice, or have you been manipulated to opt for bigger than intended?

Jumping into Conclusions

Jumping to conclusions is a common phenomenon, where people prematurely decide and finalize something, without having sufficient information or choosing not to consider it.

Jumping into Conclusions: Examples

  • Inference-observation confusion: An assumption made that may or may not be correct. Example: Concluding that a guy is rich, based on the car he drives.
  • Fortune-Telling: Assumption of knowing exactly what will happen in the future.
  • Mind Reading: Assuming based on how to have read someone's mind and concluded something which may not be true.
  • Extreme Extrapolation: Finding a minor clue and making something major out of it.
  • Overgeneralization: Copy-pasting a piece of knowledge over something that you think is related, but is not.
  • Labeling: Stereotyping a set of people based on their likes and dislikes.

Why We Jump to Conclusions

The reason people jump to conclusions is the fact that they find it easy.

Fact-checking and 100 percent accuracy on everything they see or observe consume way too much time for a normal person.

Taking mental shortcuts is the path most people choose to jump to conclusions.

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Save On Transport Without a Car

Save On Transport Without a Car

You’ll save far more if you don’t buy a car or sell it if you already own one but can go without it.

If you can use public transportation, you can save quite a bit of money on ...

Save On Transport While Keeping a Car

Carpool to work if you can to significantly reduce wear and tear on your car, save on gas, and take advantage of carpool lanes that might make it easier to get to work.

Check at least once a month to keep the tires on your vehicle properly inflated. Doing so can improve your gas mileage.

Save On Debts

Refinance your home or automobile at a lower rate to save money over the life of the loan and lower your monthly payment.

If your student loans are locked in at a high-interest rate, figure out whether it makes sense to consolidate all or some of them.

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