Have you had to make an important decision and you kept weighing the alternatives, trying to decide which choice was more worthwhile? We all make important life decisions every day. We tend to focus on the benefit of our first choice and not the benefits of the next best choice. An opportunity cost is the value of the next best alternative.
Opportunity costs apply to many aspects of life decisions. Often, money becomes the root cause of decision-making. If you decide to spend money on a vacation and you delay your home’s remodel, then your opportunity cost is the benefit living in a renovated home. For time management, if you decide to spend time working late at the office on an important project, your opportunity cost is the benefit of spending quality family time at home. In business, opportunity costs play a major role in decision-making. If you decide to purchase a new piece of equipment, your opportunity cost is the money spent elsewhere. Companies must take both explicit and implicit costs into account when making rational business decisions.
Example of Opportunity Costs in Decision-Making
For example, Bill Gates dropped out of college. Yet, he ended up creating one of the most successful software businesses in Microsoft. His opportunity cost was the benefit of a college education at Harvard and a stable, successful career working for someone else. However, his entrepreneurial drive led him to choosing the route of becoming a self-starter and entrepreneur. While most people who drop out of college do not become billionaires, it was different for Bill Gates. The opportunity cost of staying in college and working for someone else didn’t have enough value compared to his dream of becoming an entrepreneur.
Life decisions require the two following things:
- Personal self-reflection regarding the benefits of the first choice
- The opportunity costs of the next best choice
Your opportunity costs are not the same as the person sitting next to you. The true cost of one choice is the cost of what you give up to get it. The more choices we have in society, the more you have to give up by choosing one thing over another. As long as you are content with the result of your decision, whether you think about what you gain or lose, you can live a successful life.
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