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An opportunity cost is the value of the best alternative to a decision. Decisions typically involve constraints such as time, resources, rules, social norms and physical realities. Doing one thing often means that you can't do something else. Opportunity cost is the practice of calculating or considering what you can't do as the result of each possible decision. The following are illustrative examples.
Risk vs RewardAn investor decides that the market is overvalued and goes completely to cash. This dramatically reduces their risk at the opportunity cost of the potential returns of being invested.Education vs WorkA student considers the cost of a four year university education by calculating total tuition and expenses for the period. They may also include the opportunity cost of missing four years of salary in their calculations.
Product vs ProductA factory can produce 12,000 jars of peanut butter a day. The opportunity cost of every jar of smooth peanut butter is one jar of chunky peanut butter.Service vs ServiceA small airline has 28 aircraft. Their opportunity cost of offering a Tokyo to Hong Kong flight is the ability to offer a Tokyo to Taiwan flight.Salary vs Quality of LifeAn IT worker is offered a new job with a higher salary in a city with a lower quality of life. The opportunity cost of the higher salary is a lower quality of life such as reduced air quality.
Cost vs QualityA manufacturer of headphones is facing stiff competition from low cost products with similar designs to their own. They decide to increase quality of their build to make the competition look and feel comparatively cheap. The opportunity cost of the new product design is increased cost and inability to compete on price.Abilities vs AbilitiesThe opportunity cost of after school violin lessons at a particular school is the ability to join other after school activities such as baseball or the chess club.
Decision Making
This is the complete list of articles we have written about decision making.
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A list of decision making techniques.
The observation that groups may make collective decisions that are viewed as wrong or irrational by each individual member of the group.
A complete guide to the decision making process.
Rational thought is often somewhat logical but includes factors such as emotion, imagination, culture, language and social conventions.
The common types of uncertainty in decision making and strategy.
A definition of information costs with examples.
A definition of reverse brainstorming with examples.
The definition of decision fatigue with examples.
Taking a position that you do not necessarily agree with for the purposes of argument.
The definition of paradox of choice with examples.
A list of thinking approaches and types.
A few logic terms explained.
A list of common cognitive biases explained.
A few dangers of being too abstract.
The difference between objective and subjective.
A definition of intellectual diversity with examples.
The definition of creative value with examples.
The definition of anecdotal evidence with examples.
The definition of benefit of doubt with examples.
The definition of pessimism with examples.
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