Everything has a cost
Everything has an opportunity cost attached to it. Opportunity cost refers to the fact that whenever you decide to do something, you could have done something else at that point in time. In other words, whenever you chose something, you forgo all the other things that you could have chosen instead.
For example, right now you're reading this article about opportunity cost. You could be doing hundreds of others things instead of reading this article but somehow you're reading this article because you think that you can derive more value by reading about opportunity cost than whatever something else you could be doing at this moment.
Opportunity cost is one of the most important concepts you are ever going to learn. Whatever you do, there's always be an opportunity cost involved.
For example, if you decide to watch a particular movie on Netflix, it means you're forgoing all the other content. At that moment, you're choosing to forego not only the Netflix content but also the content of other streaming sites like Youtube, Amazon Prime, etc. In fact, you're not only sacrificing the other streaming alternatives but also the other things that you could have done at that time. For example, you could have read a book, you could have played with your daughter, you could have talked to your parents, etc.
Opportunity cost is essential for personal finance too. Whenever you decide to buy something, always ask yourself what is the next best way in which you could have to spend that money. For example, if you decide to buy a shirt worth Rs. 2000, you can always ask yourself, what is the next best way in which you can use that money. If you're like me, you can buy some books with that kind of money. Or you can take your loved one out for a dinner. It doesn't matter what you do ultimately, what matters is that you should always think about the opportunity cost involved.
Opportunity cost matters in government expenditure as well. We generally think that our governments have an unlimited supply of money, which is not true. Our governments have limited resources which means that every rupee spent on some useless scheme and subsidies is the money that could have been used towards essential services. Every money that government squanders could be used to build a few kilometers of highway.
Investing is another area where we can use the idea of opportunity cost to our advantage. Whenever a share that we hold loses its value, we often find it hard to sell it. Often we decide to wait for it to rise to its original value. We decide to do so even when we know that the chances of this are very less. We don't like to book losses.
We are stubborn in the way that we look to recover the losses from that particular share only. We don't think about the opportunity cost involved. What we don't understand is that we could have invested this amount in some other stock that had better prospects. Money is money. Profit is profit. It doesn't matter whether the profits we are going to generate comes from the same share that had lost its value or from some other new share with better prospects and fundamentals. Not thinking in terms of opportunity cost might prove to be costly in the share market.
The idea of opportunity cost has applications in almost all areas of our life. Opportunity cost is not just a theoretical concept, it's a lens that alters how you view the world. It is a tool that has the capability to serve you well. It's a way of thinking. My advice is to always think in terms of opportunity cost.