The Personal MBA

Master the Art of Business

A world-class business education in a single volume. Learn the universal principles behind every successful business, then use these ideas to make more money, get more done, and have more fun in your life and work.

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What Is 'Opportunity Cost'?

Opportunity Cost is the value you're giving up when you make a decision. Whenever you invest time, energy or resources in something, you are implicitly choosing not to invest it in something else. Paying attention to what you're giving up helps you evaluate past actions and make better future decisions.

Josh Kaufman Explains 'Opportunity Cost'

Let's say you decide to quit your $50,000/year job and start a business. Starting the business will certainly have costs of its own, but it will also cost you the $50,000 you would have made had you stayed at your job.

Opportunity Cost is the value you’re giving up by making a Decision. We can’t do everything at once — we can’t be in more than one place at a time, or spend the same dollar on two different things simultaneously.

Whenever you invest time, energy, or resources, you're implicitly choosing not to invest that time, energy, and resources in any other way. The value that would have been created by your next-best alternative is the opportunity cost of that decision.

Opportunity Cost is important because there are always other options. If you’re working for a company that’s paying you $30,000 a year and you have the option to move to a company that’s paying $200,000 a year for the same work, why would you stay? If you’re paying your employees or contractors less than they can make elsewhere for the same work, why would they work for you? If your customers can spend $20 to get something you’re charging $200 for, why would they buy from you?

Opportunity Cost is important because it’s hidden. As we discuss in Absence Blindness, humans have a hard time paying attention to what’s not present. Paying attention to what you’re giving up by making a choice helps you consider all of your options accurately before making a decision.

Obsessing over Opportunity Cost too much can make you needlessly crazy, however. If you’re a natural maximizer (like I am), it’s tempting to over-analyze every choice to make sure you’ve chosen the very best option available, which can easily go well past the point of Diminishing Returns. Don’t get bogged down with all of the options available — consider only what appear to be the best alternatives at the time of your decision.

If you pay attention to the Opportunity Costs of your decisions, you’ll make much better investments of the resources at your disposal.

Questions About 'Opportunity Cost'


"Business, more than any other occupation, is a continual dealing with the future; it is a continual calculation, an instinctive exercise in foresight."

Henry R. Luce, publisher and founder of Time Inc.


From Chapter 5:

Finance


https://personalmba.com/opportunity-cost/



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The Personal MBA

Master the Art of Business

A world-class business education in a single volume. Learn the universal principles behind every successful business, then use these ideas to make more money, get more done, and have more fun in your life and work.

Buy the book:


About Josh Kaufman

Josh Kaufman is an acclaimed business, learning, and skill acquisition expert. He is the author of two international bestsellers: The Personal MBA and The First 20 Hours. Josh's research and writing have helped millions of people worldwide learn the fundamentals of modern business.

More about Josh Kaufman →