by David B. Bohl
My son attends Cornell University, where I have had the pleasure of meeting and talking with Professor Robert H. Frank, author of The Economic Naturalist: In Search of Explanations for Everyday Enigmas.
One topic that Professor Frank covers in his writings is the “opportunity cost” or the “implicit value of other opportunities that must be forgone” in order to take advantage of a specific situation or acquisition.
This basically means that in order to gain something, you must lose something else.
How does this factor into the decisions we make in our everyday lives?
You may perceive that a certain opportunity offers a specific advantage to you… and yet, you must also recognize that you will be required to sacrifice something else in order to attain it – time, money, miles, physical or mental energy, whatever the case may be. The key to determining the actual opportunity cost or subjective value in your particular situation, is to balance the gain with the loss and decide if whatever is left over meets or exceeds your original motive for making the decision.
I’m inclined to tell my life coaching clients… in this information-overload world that we live in, it would do us a world of good to perfect the art of calculating the opportunity cost as a means of making better decisions. Decisions that are an accurate depiction of who we are. Decisions that support our life’s values and cement our future happiness.
The first step is of course, figuring out what our values are. Believe it or not, many people are so used to living by other people’s creeds and standards, that when they are asked to strip away all outside influence and speak from their inner convictions, they have trouble knowing where they stand in many areas.
So ask yourself: what’s important to me? Is it family? Work, and getting ahead? Living a balanced lifestyle? Faith in my religion? Health? Or, is it a matter of figuring out which order of priority each of my values falls into, from most important to least important?
Once you feel secure in your values, then the next step is to train your mind to make better decisions. With respect to making personal choices, many of us seek out the advice of experts and go information-hunting on the internet. Have you noticed that this frequently results in feelings of overwhelm and an inability to take decisive action?
Learning to make better choices involves looking beyond immediate perceived value and instead quantifying the cost of every opportunity you’re faced with – the opportunity cost. It takes time to adjust to this mindset, but once you welcome the practice into your life, you’ll find that it gets easier with each new challenge that comes your way.
Some real-life examples where balancing the opportunity cost can help you make better decisions:
A bigger salary sounds pretty good on paper. And yet, we must determine whether “the highest salary for our field” is worth the life sacrifices required to maintain such a position. You may find that the highest paying jobs also demand more of your time – with tighter deadlines, more responsibility, frequent travel, pressure to drive results faster. Is it worth making such sacrifices for a higher paycheck? These days, many people are saying no.
Let’s say you’re searching for a great deal on hotel accommodations. You want the best deal you can get, which typically translates to rates. And yet, you must also factor in extra time spent traveling back and forth between the hotel and your daily destinations, gas mileage, and other considerations. Is it worth traveling the extra distance to a hotel that costs less, knowing you’ll end up losing time and spending extra on gas?
Business and Buying Decisions:
We choose to do business with certain banks, credit card and insurance companies based on perceived value – what we feel we’re getting out of the deal. And yet, the value that they in fact offer may not be in line with our lifestyle. Many credit card companies offer perks such as acquiring travel points that can be applied to airfare. This may seem like an advantage – and yet, if you’re not the traveling type, this offer would hold much less value than it would for someone who does business in many different cities on a regular basis.
The point I’m making is that in order to make decisions that support our future happiness, we cannot rely solely on what other people tell us. Instead, we must clearly determine whether the situation will prove beneficial to us alone, in that particular situation. By practicing how to evaluate the opportunity cost in a way that delivers the highest outcome, we will become stronger in knowing what we want out of life and how to get it.