Opportunity cost is a hidden cost we all face when we are taking some serious decisions. Opportunity cost includes what you are giving up while you’re choosing some other option. Let’s explore opportunity cost in this post.
As per Wikipedia, opportunity cost of an activity or option is the loss of value or benefit that would be incurred (the cost) by engaging in that activity or choosing that option, versus/relative to engaging in the alternative activity or choosing the alternative option that would offer the highest return in value or benefit.
If we’re not doing anything, then also we are losing important and sometimes rare opportunities. For example, let’s say it is the last week of March 2020, and stock markets around the world have crashed massively. And at the time, there was a great opportunity to invest money in the stocks to earn massive returns in the next 2 years. However, it seems easier to predict that in hindsight, but it was not that easy at that time.
We make choices all the time. From choosing what clothes to wear in the morning to which career stream to pursue. When choosing a piece of cloth to wear, you are indirectly saying no to all other clothes. Same for career streams. Each decision gives us something and costs us something. Cost here comes from hidden gains from other options which you’re not choosing.
Let’s say there are 4 options
D to choose from, and you choose
option B. So, your net outcome of your choice is will be,
Net outcome = Gain from option (B) - Loss from option (B) - Gain from option (A + C + D) + Loss from option (A + C + D)
Basically, by choosing
option B you are avoiding the loss(if any) of 3 other options, but you’re also losing gain(if any) of those 3 options. That’s what opportunity cost is.
Opportunity cost does not always mean in a negative way. Sometimes, we are actually doing the “right” thing by avoiding other options. I wrote right in the double quotes, as it means different things to different people.
More we realise about this concept of “opportunity cost”, the more we get FOMO - fear of missing out.
FOMO - Fear Of Missing Out
FOMO means, as it’s full form says, a fear we get when we think about something which we are letting go. For example, let’s say there’s a sale going on an e-commerce platform, and you’re not leveraging the benefit of it, then you might get FOMO. We don’t want to miss the chance of gain we can get by exploiting that opportunity.
I have realised that I personally am largely driven by FOMO. I want to win gains from every opportunity I can get. So, I fear with a thought of “what if I am missing something?”. FOMO is not necessarily a bad thing though. FOMO triggers your brain to seriously think about other options. This helps in our decision-making process, as it allows us to evaluate each option without any bias.
Investors face FOMO a lot. Primary job of investors is to invest in startups/companies which are most likely to grow in the future. So, they constantly think about, “what if I don’t invest in this startup/company, and it grows massively in the future?”. That’s what makes them invest in so many companies.
If we look more closely, we all are driven by FOMO to some degree. Whenever we think, “what if I miss this other opportunity?” it’s a FOMO. Realising that face is a good thing.
I feel, FOMO balances out our bias towards one of many options. And that’s a good thing. FOMO allows us to also evaluate other options.