I have lost much sleep overthinking, rethinking, and playing the what-if game on decisions I’ve made in my life. Sometimes it’s one night’s sleep, other times it quite literally keeps me up at night for many nights in a row. While the rational part of my brain can talk me through my choice, the irrational side keeps nagging with the what-ifs. I think if, at the time of making a choice, I apply the opportunity cost principle, I would lose less sleep.
Opportunity cost is what you give up, in order to get something else.
The Economic Principle:
In economist speak, you are constantly making choices and those choices consist of trade-offs. When you choose one thing over another, the opportunity cost of your choice is the “cost” of the next best option.
Opportunity Cost in Action:
If you’re planning a date night with your significant other and your options are to go out to eat or to cook at home, whichever option you don’t choose is the opportunity cost. Let’s say it takes the same amount of time to cook the meal, eat, and clean up as it is to drive to the restaurant, dine, and come home, so time isn’t factored into this equation. This example still has both objective and subjective costs.
Objective Cost: Quite literally the expenses – dining out may cost double what it would cost to eat in. The objective opportunity cost here what you could do with the amount of money you saved by dining in versus eating out.
Subjective Costs: These costs usually can’t be quantified in a dollar amount, but are important factors in making a decision. In this specific example, there are multiple subjective costs that may not be immediately apparent, but they are choices that are going on in the back of your mind, whether you realize it or not. Some of these may include:
- Time and enjoyment – It’s a Friday night, you’ve had a long week, and the last thing you want to do is wash dishes at the end of the meal. Going out may be worth more to you than cooking a meal at home.
- Change of Scenery – If you’re a SAHM like me, you spend most of your time in hangout clothes and a messy bun. Sometimes it’s nice to have an excuse to put on a full face of makeup, get dressed up, and get out of the house for an adult date night.
- Relaxation – When I was working full-time, the last thing I wanted to do was go out, again. I wanted to come home, take off my makeup, and just enjoy the privacy of our home.
I’d like to point out that sometimes, money is not and should not be, the number one reason for making a specific choice. As in the example above, money goes up against three subjective “costs” that may mean more to you when making your decision. In fact, life usually puts us in situations with exactly this format and you have to decide if the opportunity cost of the choice you make is worth it to you.