When I first learned about “Opportunity Cost” during my senior year of high school, I remember it fundamentally changing my outlook on life.
The realization that every decision has implicit costs associated with it (i.e., the lost value that would have been gained from my next best alternative) is a powerful one. The old adage, “There’s no such thing as a free lunch” explains the concept well.
If Joe Smith wins a “free” trip to the Bahamas and decides to vacation, the true cost of his trip is not nothing. Because while Joe Smith may not actually pay any expenses for the trip, he still forgoes the income he would have received had he decided not to travel (and instead continued to work). While there are no explicit costs, there are implicit ones. When making decisions, not accounting for these very real implicit costs is a mistake.
It was Socrates who said, “The unexamined life is not worth living.”
Part of education’s responsibility is to equip us with tools to better examine our own lives, and “Opportunity Cost” is a great example of this. Learning to internalize opportunity costs makes us better decision-makers.
The more you think about opportunity costs, the deeper its implications cut.
In economics classes, you’re often provided with these cookie cutter examples (like the “free” trip to the Bahamas example I shared before). And while these simple examples are helpful in explaining “opportunity cost” to a novice, they don’t tell the full story.
In reality, there are a near infinite number of actions an individual can take at a given point in time (not just two, as these basic examples suggest). So, in theory, there’s also a single action amongst this infinite opportunity set that would yield a maximally productive outcome.
When taken seriously, these implications demand an extreme level of thoughtfulness.
Joe Smith, who was originally deciding between (1) a free trip to the Bahamas and (2) continuing to work his day job, actually has much more analytical work cut out for him because those two options only represent the tip of the iceberg. If Joe wants to be thorough, he would spend time trying to internalize all possible alternatives: enrolling in a coding bootcamp, spending time with his sick grandmother, building the blog he always wanted to start, replacing the degrading picket fence in his backyard, and on and on it goes...
There are practical limitations with this type of thinking, however.
First off, you don’t know what you don’t know. With a near infinite set of decisions, you’re guaranteed to leave out qualified alternatives that you don’t even realize you're excluding. Second, even if you could identify all relevant alternatives, the internal analysis that you conduct to determine the productive value of each option is based on your best guess. This analysis will certainly be faulty. These practical limitations, in addition to the fact that there are time constraints with decision-making, make the analytical process challenging.
As a competitive person, it’s easy for me to get caught up in these types of optimization games.
I have mixed feelings about it. On the one hand, I’ve certainly benefited from thinking deeply about opportunity costs and trying to aggressively optimize even minor aspects of my life. I know that good decisions made over extended periods of time bring about real change, and I can see this manifesting in a very material way in my own life.
On the other hand, there's an argument to be made (which I take seriously) that this utiliatiarian optimization approach to life is ill-conceived. Even with perfect information, the idea that one’s life decisions can be boiled down to a numerical value and compared to alternatives feels overly-simplistic. It’s like asking your friend to describe the Mona Lisa with one word and your friend responding with, “woman”. It can be a counter-productive exercise.
As with much in life, there’s probably a balance that needs to be struck. There’s no doubt in my mind, especially with major life decisions, that a careful analysis of opportunity cost is valuable. On the flipside, playing optimization games has diminishing marginal returns. It becomes exhausting when you start overanalyzing minute life decisions.
With my personality, I expect I’ll fall into these optimization traps many, many more times in the future. I just hope that as I make these errors I don’t lose sight of the reality that life is not so much a game to be won as much as it is an experience to be embraced.
