How Understanding Opportunity Cost Can Improve Your Life

One of the first concepts taught in Economics is something called ‘Opportunity Cost.’ It refers to the value the second best option forgone when making a choice.

For example, if I choose to buy an apple with the only dollar in my pocket, and bananas are my second favorite snack item, then the Opportunity Cost of purchasing that apple is one banana (assuming that the banana and the apple both cost a dollar). The value of the Opportunity Cost is typically not given in dollars, as the Opportunity Cost of spending a dollar on the apple is not the dollar itself but the fact that I am giving up the opportunity to buy a banana. Every decision you make has an Opportunity Cost because there is always something you have to give up in order to get what you choose.

Few disciplines outside Economics teach this concept, but it is completely central to decision making, which everyone has to do all the time. As a result, it frequently gets overlooked when people make what I would consider to be the most important decision we make each morning: what to do with our time.

Many people just let each day play out as it comes, straying down detours and reacting to each obstacle that falls in their path.

What’s tricky here is that there are really an infinite number of ways you could spend each hour of the day. How do you decide what to do? How could anyone ever make the right decision?

Start by being intentional about planning your day. Maybe this starts right when you wake up, or maybe it happens some time later in the day. When it happens isn’t necessarily important.

The real key here is that you think about all the things that you could do during the day, and then make a conscious decision about what you’re NOT going to do. Problems will pop up and last minute deadlines will get set, making it difficult to plan out a day to the minute. But if you clearly understand the important things you want to accomplish, and understand the things that consume your time but don’t provide any value, you’ll be in control when issues arise and you’ll avoid doing the things that don’t provide you with sufficient value.

The act of simply thinking about the various ways you could spend your time will help you begin to understand the Opportunity Cost of each action and ultimately lead you to avoid the actions that have the highest Cost, helping you be more effective in your work, more happy in your relationships, and more content with yourself.

Next, think about how much value you’re giving up by the way you act each day. Remove the things that don’t provide you value.

Maybe you spend a significant amount of time checking your email each morning. Is that the best way you could be spending your time? Maybe it is. In which case you shouldn’t change that. But what if you can think of even one other thing that you could be doing during that time that would be more beneficial? Do that instead. Don’t waste your time. You have to control your day.

Finally, start building good habits around your old, costly habits to help you avoid inefficiency and stay healthy. This will help you stay disciplined throughout the day so that you can avoid making decisions with a high Opportunity Cost.

Every minute you spend doing one thing prevents you from doing another. You will never be even close to perfect in minimizing your Opportunity Cost throughout the day. But what if you could be even marginally better than yesterday? What if the decisions you made today provided even a tiny bit more value than the other options? And what if you could do that every day?