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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 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...
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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 alternative - Return on the chosen option.
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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, like Money, on healthcare, comes with the 'opportunity cost' of being unable to spend that amount on ed...
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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 one of the scarce resources always leads to a trade-off in gains.
It is important to a...
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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.
Example: While deciding on which job offer to take, we may consider job satisfaction, brand name, com...
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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...
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.
Risks of Ignoring The Opportunity Cost
It's easy to overlook the cost of hypothetical opportunities. But if neglected, opportunity costs will negatively impact your life, career, and relationships.
- Working on autopilot means you put in the hours and get paid, but you end up with nothing: no important know...
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