Understanding Opportunity Costs Leads to Better Decisions

In order to gain something you must lose something; that is how you can define opportunity cost. You can decide that something you want has a specific advantage, but at the same time you are going to have to sacrifice something to get it, like time or energy.  Figure out what our values are, train your mind to make better decisions-looking beyond immediate perceived value and figuring out the cost of every opportunity you are faced with.

Daniel Sitter recently wrote a post on his Idea Sellers blog titled What is the Value of Selling Your Time?

This has prompted me to share a few ideas on this very subject.

Opportunity Cost is one of those concepts that all of us think we understand, but we’re often unable to calculate the real dollars involved.

In its simplest terms, Opportunity Cost can be defined as follows:

In order to gain something, you must lose something else.

How does, and should, 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, energy, whatever. The key to determining the actual opportunity cost 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.

Thanks to Joe at Working at Home on the Internet for including me in his Working at Home Blog Carnival, to Sagar at Credit Card Lowdown for including this post in the Carnival of Money, Growth, and Happiness, and to The Skilled Investor’s Financial Blog for including this in the Carnival of Financial Planning.

Explore Similar Topics

Recent Post

Slow Healing

I have been thinking about connections again. As I watch the world crumble and change around me, it becomes even more apparent that we’re on

Read More »
relinquishment and addiction