top of page
Search

Opportunity Cost


Opportunity cost refers to the potential value an individual could have received but missed out when they chose another option.


Let’s take a closer look at what it is and how you can use this concept.

Opportunity cost

Opportunity cost is the value you lose when you commit to a particular option over another.

Let’s take a simplified example, today’s choice may be buying a $5 coffee. The trade-offs are: not being able to spend that same $5 another way today and in the future, not having benefitted from saving $5 regularly.


Ask yourself: how much do I value this? What do I have to give up now if I make this choice? What do I have to give up in the future to make this choice?


Now consider choosing between selling your assets now or holding on to them to sell later. You may secure immediate gains by selling now, but lose out on potential future gains.


Opportunity costs are unseen and therefore can be easily overlooked. However, an understanding of the potential missed opportunities when choosing one investment over another ensures better and more profitable decision making. You make an informed decision by calculating the potential gains and losses of each decision.


How to calculate opportunity cost

Opportunity cost is not an exact calculation. However, you may estimate the future value that you chose not to receive and compare it with the value of the choice you committed to.

The formula used to calculate opportunity cost is the difference between the potential returns of each option.


OPPORTUNITY COST = RETURN FROM THE MOST PROFITABLE OPTION – RETURN FROM CHOSEN OPTION


To properly evaluate opportunity costs you need to consider and compare the costs and benefits of every option available. Every decision has losses and gains.


Long-term

Opportunity cost can help you to make personal and investment decisions. It requires you to think long-term. It’s very easy to contemplate the cost you incur at the moment a decision is made. You may be more likely to choose a decision that will earn you more money in the short-term, but long-term growth usually involves making decisions that don’t offer a return until much later.


It’s important to consider opportunity cost in your decision making to help prevent major losses.


Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
0 views0 comments

Comments


bottom of page