Opportunity Cost Calculations - Deepstash

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

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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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?

The cognitive dissonance theory

Suggests that holding 2 or more contradictory beliefs at the same time causes people to experience mental discomfort, which manifests as psychological stress. 

And people will alw...

The Benjamin Franklin effect has generally been explained using cognitive dissonance theory.

Essentially, this means that when someone does you a favor, they need to be able to justify...

The Benjamin Franklin effect has generally been explained using cognitive dissonance theory.

Essentially, this means that when someone does you a favor, they need to be able to justify it to themself, in order to avoid the cognitive dissonance that might occur from doing something nice for someone that they dislike.

The Benjamin Franklin effect

Is a psychological phenomenon that causes us to like someone more after we do that person a favor: We justify our actions to ourselves, that we did them a favor because we liked them.

But the reverse effect is also true - we come to hate our victims, which helps to explain wartime atrocities.

Tradeoffs
Every decision we take, has a tradeoff, an opportunity cost. Instinctively we try the all-out approach, resulting in failure.
The real problem lies in our judgm...
Striving for Everything

A tradeoff is inevitable in almost every decision we take, as we usually forego some opportunity or benefit in our choices.

Many people strive for everything and believe there are no tradeoffs.

Focussing on less can get you something but focusing on everything may get you nothing.

Having "Everything"

We seem to think that the people around us have everything in life.

Tradeoffs in others take time to become apparent. Everyone lets go of something, making a sacrifice, to be able to focus, investing time and energy in what is important to them.