What Opportunity Cost Is and How It Affects Your ProductivityAUTHOR: Francisco Sáez
"Intelligent people make decisions based on opportunity costs." ~ Charlie Munger
Opportunity cost is a concept used in economics to identify the cost of not doing something. It’s the value of the alternative action lost in making a decision, and is usually a monetary value.
In the financial field, it is used to evaluate investments when there are several possible alternatives and limited resources. For example, if an investment fund offers you a 3% annual interest rate and you have $10,000 in a drawer in your house, not investing that money in that fund would have an opportunity cost of $300 per year for you.
This concept can be extended to any area of life in which we have to make a decision, because just as we cannot spend the same money simultaneously on two different things, we cannot be in more than one place at the same time or do it all at the same time. We have to choose, and when we choose one thing, there is one or more alternatives that we are discarding.
Often our effectiveness is diminished because we tend to ignore the opportunity cost of doing or not doing something when there isn’t money involved.
Not thinking about opportunity cost can greatly affect issues related to your personal productivity, goal achievement, career development, etc. Every time you invest your time and energy in something, you are implicitly choosing not to invest your time and energy in something else.
That is why not knowing how to say no can become one of the biggest enemies of your personal productivity.
In general, it’s very important to always take into account the opportunity cost when making a decision, because very often the cost isn’t visible or can’t be calculated in an intuitive way. It’s not easy for human beings to take into account that which is hidden.
If you pay attention to what you’re giving up when you’re making a decision, you’ll be able to consider the alternatives more effectively.