This is Gonna Cost me...

Updated: Oct 8, 2021

Broadly speaking, crises give the general population a crash course in a specific field or lesson. For example, the financial crisis of 2008, for better or worse, gave everyone a crash course in mortgages and how banks finance their operations. The great depression taught us, of many things, the woes of decision-making that are rational for the individual but detrimental for the aggregate. Specifically, choosing to save your money because of dire future outlooks is reasonable for you but it leads to a decrease in aggregate spending which is detrimental for GDP and, by extension, employment, thus creating a vicious cycle. To take a more recent example, the whole globe got a crash course in virology. More specifically, everyone became aware of the mechanism of spread and how to combat respiratory viruses. We could also add personal hygiene, exponential thinking, and some statistics to that account. These crash courses have always had with them a hidden friend. One that we encounter so often but almost always fail to acknowledge until after the fact. That course is opportunity cost.

Before we begin, we should define opportunity costs. It is assigning value to what is given up for what is gained. For example, if you spend a dollar on pies *coughs*, you essentially gave up every other thing worth a dollar to have the pies. (To get more granular, read this.) It is important to stress that the flip side of opportunity costs is opportunity benefits, which essentially follows that definition. It is the benefit you give up for the one you gain. Let us use this lens to analyze where we are currently.

A stark lesson in opportunity costs came across my newsfeed recently. To quote, "East Side Charter School in Wilmington, Del., is offering parents $700 to drop off and pick up their children for the school year." The question is, should parents take this offer? For some, it is an easy decision. After all, they already dropped off their children at an accounting loss before the economic incentive was put in place. For others, they'll have to calculate the marginal cost of their time by accounting for how much they would give up in either sleep, work, or leisure. The question boils down to this: what is your alternate course of action, and how much is it worth? This decision does not confront the parents alone. The high school had to face the cost differently with the same principles.

The lesson here can be extrapolated to other domains. For example, physical decision-making. When deciding whether to pick up a martial art for self-defense, you must consider the immediate and cumulative physical toll it places on your body. Further, you cannot discount the risk of a debilitating injury that affects every other aspect of your life and significantly decreases your standard of life. You gain, in return, a tight and supportive community of individuals who make one better in a significant way. You gain the health benefits from continued exercise. You also gain confidence and assertiveness, which, when applied, increases your potential earnings. Most importantly, you learn to defend yourself and those you love by having the skills and significantly lowering the risk of getting into easily avoidable fights that result from the ego. This thought process is crucial in making career decisions, marriage decisions, life decisions, educational and academic decisions.

My broader point in this piece is this, whether you internalize the lesson of opportunity costs now or later is irrelevant. You will encounter and learn about it by infection or inoculation. The earlier you notice and make the requisite mental adjustments, the better. Being more rational at this margin will make our lives better.

Certainty Rating: 70.5%


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