Learn more about moneyandinvestments with this collection
The impact of opportunity cost on personal and professional life
Evaluating the benefits and drawbacks of different choices
Understanding the concept of opportunity cost
What is Opportunity Cost?
An Opportunity Cost is the loss of other alternatives when one option is chosen or no action is taken. Opportunity costs are unseen, not included in financial reports, and can often be forgotten about in capital budgeting. Part of the reason opportunity costs are unseen is because they consider Implicit Costs.
An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. These costs are much harder to measure as they are not always quantitative. Being aware of trade-offs will allow managers to make better-educated investment decisions.
30
285 reads
MORE IDEAS ON THIS
The Difference between Sunk Costs and Opportunity Costs: Reporting and Role in Decision Making
Reporting
- Sunk costs have already been paid for and are reflected on balance sheets and financial statements
- Opportunity costs are not shown on financial statements, though they may be included in managerial reports
Role in Decision Making
33
223 reads
The Difference between Sunk Costs and Opportunity Costs: Meaning and Estimations
Meaning
- Sunk costs have already been incurred and cannot be recovered by any means
- Opportunity costs represent forgone returns of alternative opportunities
Implicit or Explicit
- Sunk costs are explicit as they are the resu...
32
237 reads
Challenges with Sunk Costs
It is important to note that while all sunk costs are fixed costs, not all fixed costs are sunk costs.
Sunk costs are, by definition, those which cannot be recovered by any means. Some previously incurred costs can be sold on for their purchase price and therefore are not ...
27
335 reads
Sunk Cost Fallacy
One trap managers should be aware of when it comes to sunk costs is the sunk cost fallacy. The Sunk Cost Fallacy describes our tendency to follow through on an endeavor if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits.
39
335 reads
Challenges with Opportunity Cost
The main challenge with opportunity costs is that they are hard to accurately calculate. Returns on investments are often estimated rather than hard-set figures.
It is also not always easy to define non-monetary factors like risk, time, skills, or effort. This is not to sa...
28
245 reads
What is a Sunk Cost?
A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. Given that sunk costs have already occurred, the cost will remain the same regardless of the outcome of a decision, and so they should not be considered in capital budgeting.
29
398 reads
CURATED FROM
IDEAS CURATED BY
Sunk Costs are explicit and appear on financial statements so it is understandable why these costs are honed in on. Opportunity Costs are implicit and unseen, so they are often overlooked.
“
Related collections
Other curated ideas on this topic:
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 ...
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.
Read & Learn
20x Faster
without
deepstash
with
deepstash
with
deepstash
Personalized microlearning
—
100+ Learning Journeys
—
Access to 200,000+ ideas
—
Access to the mobile app
—
Unlimited idea saving
—
—
Unlimited history
—
—
Unlimited listening to ideas
—
—
Downloading & offline access
—
—
Supercharge your mind with one idea per day
Enter your email and spend 1 minute every day to learn something new.
I agree to receive email updates