Opportunity Cost In Life

Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

In economics, opportunity cost is defined as the cost of not choosing the next, best alternative for your money or time.  

Everything in life has an opportunity cost.  If you want to go to the movies with friends it means you can’t stay home and read a good book.  If you want to spend cash on new furniture, it means you can’t buy more shares of a blue chip stock for your portfolio.  If you want to donate time to a charity that helps clothe poor children, it means you can’t be down at the local soup kitchen feeding the hungry.  

[mainbodyad]Each of us has vastly different opportunity costs for the same actions.  If your parents can pay for college, you might be able to get a low-return degree that doesn’t pay well without destroying any hope of future economic security.  If you are naturally gifted at sports, you might be able to invest time in earning a golf scholarship to cut the total expenses you have to pay to get a degree in finance.  We cannot control the opportunity costs that are presented to us at birth, only work with the cards we are dealt and attempt to structure the best possible hand.  In a free and just society, everyone has the opportunity to move up the socioeconomic hierarchy by providing value to society.  

We live in a finite world.  As the CEO of your life, your job is to invest the 525,600 minutes per year and the money that is under your control in a way that results in the greatest happiness for you and your family, while simultaneously paying it forward to improve society for the next generation.  

Instead of being upset about the presence of opportunity cost, or ignoring it through omission bias, embrace it.  Arrange your life.  Make choices.  Live with the consequences of those choices.  If they turn out to be wrong, as long as you can handle the downside, remember the lessons for the next go-around.