To Be Effective You Need To Understand Opportunity Cost

Every time we take a decision to do something we automatically reject the opportunity to do something else. That’s why in order to be effective you need to understand opportunity cost.

The opportunity cost of going to that meeting you don’t want to attend is getting some work completed. The opportunity cost of working twelve hours a day six or seven days a week is the time you could have spent with you family or relaxing. Everything has an opportunity cost.

The easiest way of evaluating the opportunity cost of anything you do is a simple question. “If I do this what will the effect be on achieving my goal or objective?”

It makes decision making easy. If what you are about to do does not move you or your organisation towards your goal then is it worth it?” If the answer is no then don’t do it. However, it’s not that simple.

If your goal is to be a concert pianist and you have the option of watching a tv programme or practicing the piano then the opportunity cost if you watch the tv programme is that it will take you longer to achieve your goal. The opportunity cost is too high. Alternatively if the option is to attend your daughter’s wedding then the opportunity cost is very low and worth spending.

Greg McKeown in his book Essentialism tells the story of attending a work meeting rather than being with his wife when their child was born. Sometimes, as he admits people will take the decision to stay with the goal and ignore the better alternative. We’ve all done it and we all regret it.

Effective people use tools like opportunity cost to produce the outcome for which they are aiming – it’s not just mathematics. If it were AI could do the calculation for us.

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