Brain Food #623

The opportunity cost of living

Thoughts of the day

In economic terms, opportunity cost is defined as the loss of other alternatives, often the next best alternative, when one route is chosen.

Considering opportunity costs when making choices helps you realise not just what is to be gained, but what is to be lost, subsequently making the choice that will bring back the highest value, from the finite resources that we have.

Charlie Munger refers to the concept of opportunity cost within the context of limited capital:

“If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs -- in other words, it's your alternatives that matter. That's how we make all of our decisions.”

But Munger also applies this thinking to what he describes as ‘practical life’:

"The right way to make decisions in practical life is based on your opportunity cost. When you get married, you have to choose the best spouse you can find that will have you. The rest of life is the same damn way."

Life will sometimes present us with opportunities that are conflicting, or mutually exclusive. And so, we must always choose what to forego, within the grander scheme of things. This thought may be daunting, but a more comforting one may be the following: by choosing, you lose what was never yours.