Updated: Jul 12
What Is Opportunity Cost?
Simple Terms - Opportunity cost is the road not taken.
Financial Terms - Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are, by definition, unseen, they can be easily overlooked. Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision-making.
Economic Terms - The opportunity cost of a particular activity option is the loss of value or benefit that would be incurred (the cost) by engaging in that activity relative to engaging in an alternative activity offering a higher return in value or benefit.
How does it apply to us (working in technology)?
As we all know, Technological change (TC), or technological development, is happening at a rapid pace & the overall process of invention, innovation, and diffusion of technology or processes is always high.
In this realm of constant change, the Opportunity Cost plays a vital role in understanding what we are missing out on or the cost of the road not taken. For example, if you consider John & Bob, who are working on cloud technologies, where John spends 1 hour each day upskilling his knowledge on cloud technology in his free time, and on the other hand, Bob spends 1 hour watching Netflix in his free time.
Here the choices are personal, and assumptions can't be made about who lost what, but we know that Every Action Has A COST! In the long run, John would have learned & made significant progress in his career, and Bob would be in the same role/level doing the same job.
There is one term that we need to remember as we speak about Opportunity Cost: Psychic Profits/Losses. Psychic profit and loss is an increase (profit) or decrease (loss) in the acting man's satisfaction or happiness. Psychic profits and losses are sensible, subjective, mental, and purely personal. They can be neither measured nor weighed. They can only be felt or sensed. The psychic profit or loss derived from any action can be compared with that of another solely in terms of more or less.
To sum it up, note that Every Action Has A COST and weigh the action against what you need OPTION A - Accounting/Tangible Profit or OPTION B - Psychic/Intangible Profit.
Always remember there are two phases of every action you take in life.
TOO EARLY to TELL
TOO LATE to STOP
Some of the best videos to watch on this topic are