Money Talk: Opportunity cost
The economics of self-management
In life, we’re faced with situations that force us to make some kind of decision, one way or another.
So how do you go about making the best decision for yourself when you find yourself at an impasse?
Thanks to the economic concept of opportunity cost, it’s easier to make such a decision while also giving yourself a long-term outlook. Opportunity cost forces you to evaluate what you should take into account, what you shouldn’t and how that will take you into the future.
The concept of opportunity cost takes into account what you have to gain from a decision, subtracted by your other decision.
Essentially, you have decision A and decision B. To see which decision has more to gain for you, you compare them as A-B=C and vice versa as B-A=C.
For situations involving interest, it takes a bit more, but for day-to-day situations, it’s a simple application.
What you don’t take into account are your sunk costs, which are one-time costs that have already been “paid” and cannot be retrieved.
You don’t take these into account because they don’t have any real bearing on where a decision might take you.
The applications for real-life use are there, however, if you can see far enough down the road to understand how decisions progress past the decision-making progress.
Utilizing such a decision-making process would give you greater confidence when looking into the future, as the uncertainty won’t seem so unnerving.
It’s important to expand the process into more decisions, especially in college.
You may already use this process and not even know it.
For example, if you use this while picking classes, you could find yourself choosing between a class that is nearly three hours long, but once a week versus only an hour for three days a week.
Are you making one day a class day and leaving the others to do work and study?
Do you eventually zone out, so it’s easier to take class in short bursts?
Maybe you have extracurricular activities that are easier to manage if you have one versus the other?
Asking these questions could mean having some great resume builders during the semester and help determine what kind of grades you get in your respective classes.
For situations that involve making an investment versus putting your money into a high interest account, you take the money you’re investing and tack on the interest that would be gained for n years – n being a variable for the amount of years chosen to be the constant.
If A is an investment in stock and B is a deposit with a high interest rate, you compare the amount spent on the investment and the amount it could appreciate by and subtract that by the amount deposited and the amount of interest you would receive after n years.
While there are formulas that will tell you exactly what each can amount to, I won’t get into that because this isn’t math class.
Opportunity cost is an important calculation to make, be it with math or any other decision-making. Your time in college will be formative in your life, some much so that they’ll define your trajectory.
Kenneth Kashif Thomas is the senior features editor and can be reached at firstname.lastname@example.org