Opportunity cost thinking is a practice that came on my radar a while ago.
It appears to be a widely recognized mental model used for decision-making but the truth is no one ever explicitly told me about it and I wish someone did fifteen years ago.
The idea was introduced to me by two fine gentleman that you might know. Warren Buffett and Charlie Munger and they talked about it in their Annual Berkshire meeting in 2003. Watching the video snippet below introduced me to the concept.
In this video they pinpoint it down to investing but I think the idea can benefit in all aspects of life.
I think in the last analysis everything we do comes back to opportunity cost, but to some extent in fact to some considerable, extent we are guessing at our future opportunity cost. (Charlie Munger)
Let's take a step back, what is the definition of opportunity cost?
Opportunity cost is the value of the next best thing you give up when you make a choice.
Here are three examples:
You are hungry and you order a pizza for 10 (enter your currency of choice), what else could you have bought to eat for this amount of money (a burger, sushi, fries, etc.) or you could have saved the money.
If you spend an hour gaming on your favourite gaming console, the opportunity cost is what else you could have done with that hour (like reading, cooking, cleaning or exercising).
If you a buy a stock the opportunity cost is what other stock you could have bought with that money and the return it would yield in the future.
This works with every idea you have or with any decision you have to make in life.
When you decide something is worth doing, for example building a website instead of making a printed brochure, there are two options:
I've seen numerous founders with the right skills do it themself. In this case the website strengthens their offer and vice versa and they do it in a cost effective way.
On the other hand I've also seen founders struggle with no-code solutions where they invest a tremendous amount of time in learning the tools and they end up with a mediocre result that doesn't strengthen their offering at all. Perhaps in this case they should have hired someone and focused all their own time on their offering and attracting more leads.
What I'm trying to say is: whenever you have to make a decision try to think about the opportunity cost and you'll know what to do.
I guess deep down opportunity cost thinking is something everybody knows about but it has to be told to you once to really grasp the idea.
