One of the core principles that has guided many of my decisions is 'Opportunity Cost’. Simply put, opportunity cost is the process of evaluating what a decision will cost you financially, time-wise, emotionally…
This one and only principle has supported me to: focus more clearly in my business, say no with ease and grace, make decisions more effectively, have a greater awareness of where my time and energy goes.
Opportunity cost is the concept, used primarily in economics to identify the cost of ‘not doing something’. When we choose one option, we are discarding many other alternative options.
Every single time you are choosing to spend your time and energy on one activity, you are at the same time choosing NOT to spend your time and energy on alternative activities.
Explicit vs Implicit
When you make a decision, there are two types of costs: explicit and implicit. Explicit costs are financial costs that you can measure and evaluate. Implicit costs are intangible like your energy, attention or emotions.
We often take into account the financial aspect of a decision. If you are choosing to go to an event with an entrance cost, you will think: ‘Is it worth me spending that money on the entrance ticket?’ But how often do you use opportunity cost when it comes to time, energy, attention and emotions?
A simple example is checking social media. Financially, there is no cost. Time, energy and attention, there is a huge cost. Sometimes, even just checking a social media feed for five minutes can derail your focus for over an hour (if for instance you read something that really shocks you or upsets you).
Often, we unconsciously bias short-term gain over long-term gain. If given a choice that is instantly appealing, but causes pain in the long-term, it takes discipline and self-control to choose the long-term gain.
To shift this bias from short-term to long-term thinking, it can be helpful to catch yourself and ask: What is the cost of me (eating that cake, going out late, skipping my workout)? And then truly listening to the answer.
Why It Matters
There are so many benefits to taking opportunity costs into account in your daily life:
Long Term Thinking: You become driven by your vision, and the long-term impact, which often better supports your business, health and relationships.
Effective Decision Making: As you take opportunity costs into consideration, you will make better and clearer decisions.
Aligned Life: Your life will be more aligned with your core principles and vision. You will feel more congruent in your day-day life.
Increase Self-Trust: As you take the different options into consideration, you will start to choose the ones that are most aligned with what matters to you and this will build up your self-trust.
Avoiding Regret: By leading a more intentional and aligned life, you are less likely to experience regret.
Optimise Wellbeing: Many of our actions have a direct impact on our wellbeing. By taking into account the opportunity costs of wellbeing from different activities, it will support you to choose more wisely, and to better support your wellbeing.
Life Principle
To embrace ‘Opportunity Cost’ as a life principle means to be aware of the costs of your actions. For example:
If you lie in this morning, you will skip your exercise routine, and you will feel more tired during the day.
If you eat late this evening, you won’t sleep as well and it will affect your productivity the next day.
If you procrastinate your most important work, you will feel regret and stress later on in the month.
But also:
If you go to your fitness class, you will have one hour less free in the evening.
If you work on this one project, that entails less time for your other projects.
If you prioritise more time & energy with your family, you will have less time for your business.
It works in all directions. Everything has a cost. All actions and behaviours have a benefit and a cost.
The question is: Is it worth it?
How can you evaluate if it is worth the cost? By checking if these actions are in alignment with your core values and vision.
If one of your core priorities is health - then skipping that late evening out is aligned with the priority of health. These don’t have to be heavily enforced principles, it is more about having an overrarching awareness of the costs of our actions, than about being rigid.
"Intelligent people make decisions based on opportunity costs."
Charlie Munger
Making it Stick
To turn ‘opportunity cost’ into a way of thinking, and life principle, you can incorporate some key habits. These habits are stepping stones towards constantly raising awareness as to how you are spending your time, energy and attention.
Pause. Before making any decisions, don’t answer immediately and ask yourself: -
How will saying yes to this impact my life?
Is it a Hell Yes, or a mediocre ok?
Will I regret saying yes to this a few days from now?
Visualise. Imagine different scenarios and reflect on how you feel based on these scenarios. As you go through the different possibilities, realise what each option entails - look at the consequences of the actions.
Quantify. Look at the different options and evaluate the benefits and drawbacks. Take into account aspects such as time, energy, emotions, attention.
FOMO to JOMO. Shift from a place of Fear Of Missing Out to Joy Of Missing Out, when you realise how much there is to gain from missing out on this option. This liberates time, energy and attention for other unexpected things to unfold.
Listen. Tune into your inner voice and intuition and let it guide your response to any decision.
Say no. When you realise that the opportunity cost is too high - when saying yes to that opportunity or project has too many downfalls, that’s when it’s time to say no.
Ignoring the concept of opportunity cost comes down to living fast & furiously, jumping into one thing after the next, and anything that pulls your attention - instead of pausing and thinking twice if it is worth it in the first place.
Once you are aware of opportunity costs, it becomes a lot easier to say no, because you are now truly valuing your time, energy and attention.
Last Note
Nothing is ever perfect, and neither is this principle. It’s all about being aligned with what matters most to you and not living on auto-pilot.
Since learning about opportunity costs and embracing this as a core concept in my daily philosophy, this has supported me to: delete instagram & twitter, go to bed earlier, say no to non-aligned projects, take holidays, prioritise well-being and health, quit alcohol and be more mindful about all of my business investments (in courses, programs, softwares…).
My go-to questions for any major decisions are:
Alignment: Is this aligned? (with my values, principles, and vision)
Intuition: What is my intuition saying about this?
Cost: What is this costing me? Is it worth this cost (in money, time, energy & attention)?
Once you can see with great clarity the cost of all the different habits and actions, it tints your way of thinking and your perspective for ever.
Enjoy the journey,
Connect with the magic,
Katie