deepstash

Beta

Get an account to save ideas & make your own & organize them how you wish.

STASHES TO GET YOU STARTED

© Brainstash, Inc

deepstash

Beta

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

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, like Money, on healthcare, comes with the 'opportunity cost' of being unable to spend that amount on education.

114 SAVES


This is a professional note extracted from an online article.

Read more efficiently

Save what inspires you

Remember anything

IDEA EXTRACTED FROM:

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

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

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

effectiviology.com

6

Key Ideas

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, like Money, on healthcare, comes with the 'opportunity cost' of being unable to spend that amount on education.

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.

Example: While deciding on which job offer to take, we may consider job satisfaction, brand name, commute time, long-term growth, and the salary offered. While finalizing, we have to forego the other best offer. While deciding on a career, we have to consider options like prestige, impact and the work sector.

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 alternative - Return on the chosen option.

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 one of the scarce resources always leads to a trade-off in gains.

It is important to account for risks associated with the different available options. Often the rewards that different options offer come with a certain risk.

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 deciding on a particular option.
  • The often neglected cost of waiting too long is also a decision that can incur a significant amount of opportunity cost, as we lose the time window to take action, losing the better option due to delay and inaction.
  • Not taking an action is also a decision that needs to be evaluated, just like other options.

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 cause a negative emotional and psychological reaction, like regret.

The opportunity cost in these cases should not be viewed as the sum of all your skipped alternatives, but only the value of the best one which is foregone.

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?

Investing defined

Investing is about laying out cash or assets now, in the hope of more cash or assets returning to you tomorrow, or next year, or next decade.

Most of the time, this is best achieved th...

Productive assets explained

  • Productive assets are investments that internally throw off surplus money from some sort of activity. 
  • Each type of productive asset has its own pros and cons, unique quirks, legal traditions, tax rules, and other relevant details.
  • The three most common kinds of investments from productive assets are stocks, bonds, and real estate.

Investing in Stocks

  • It means investing in common stock, which is another way to describe business ownership or business equity.
  • When you own equity (the value of the shares issued by a company) in a business, you are entitled to a share of the profit or losses generated by that company's operating activity.
  • Equities are the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.

7 more ideas

Identify your interests

Just about anything that you love to do can be turned into a profitable career. The key to identifying your interest areas is figuring out what you would do had you not been doing the job you ha...

Do it free

Before charging money, it is recommended that you give people a taste of your services first if you want to turn your passion into profit.

For instance, if its photography, just offer to take photos for relatives for free. Surely, they would like to save money. This is how you establish yourself and prove your mettle to your potential clients.

Build a combination of skills

You should be able to combine your chief interests with the other skills that you might possess.

If you are let’s say, planning to sell cakes, what is that other thing you are good at along with being a great baker? If you are also good at digital marketing, you can blog about baking practices.

5 more ideas