Opportunity Cost

Hi,

This week’s email is about an important consideration when deciding how to spend resources like your time and money.

Here are the key practical points you should know (mainly from my article):

• Opportunity cost is the value of the best alternative that you miss out on as a result of choosing a certain option.

• As an example, if you choose to invest in something, your opportunity cost is the money you could make by investing elsewhere (namely, in the best alternative available to you).

• Considering opportunity cost is especially useful for realizing that just because a certain option has value, that doesn’t mean you should choose it, because alternatives could be better.

• To calculate opportunity cost, compare the value that you can expect from a certain option with the value that you could get from the best alternative that you’ll have to forgo.

• A common pitfall to watch out for is calculating opportunity cost based on the value of all your forgone alternatives, rather than just the best one, which can cause you to overestimate this cost.

As always, I’m happy to hear your thoughts.

Have a great week,
Itamar