Opportunity Cost
The value of the next best alternative you give up when making a choice.
What It Is
Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. It's not just about money spent, but about what you could have done instead with your time, money, or resources. Every choice has an opportunity cost—what you give up by not choosing the next best option.
Why It Matters
Understanding opportunity cost helps you make better decisions by considering the full cost of your choices. Many people focus only on direct costs while ignoring what they're giving up. This is especially important for time management, career decisions, and investments where the alternatives might be more valuable than the chosen option.
How to Apply It
- 1
Before making a decision, identify your next best alternative
- 2
Estimate the value or benefit of that alternative
- 3
Compare the chosen option against this opportunity cost
- 4
Consider both monetary and non-monetary costs (time, energy, relationships)
- 5
Remember that doing nothing also has an opportunity cost
Example
If you spend $50,000 and two years getting an MBA, the opportunity cost isn't just the tuition—it's also the salary you could have earned working those two years, the experience you could have gained, and what you could have done with that $50,000 if invested elsewhere.