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.
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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 cause a negative emotional and psychological reaction, like regret.
The opportunity cost i...
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.
Opportunity Cost: You Can Do Anything but Not Everything
When mulling over multiple choices, the quality of any option cannot be assessed in isolation from its alternatives. The price you pay (or the sacrifice you make, or the benefits you give up) for doing what you’ve chosen to do instead of doing something else is the opportunity cost.
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