Opportunity cost

You make dozens of decisions every day. And every decision you make has a cost. By deciding to pursue one thing, you’re saying no to something else. At work, if you decide to participate in a meeting, that timeslot is filled and you can’t spend the time focused on a creative task. You can’t do everything. Life requires tradeoffs.

Opportunity cost is the cost of not pursuing alternative opportunities. The higher the value of what you could be doing versus what you actually are doing, the greater the opportunity cost.

It’s easy to recognize opportunity cost when it’s staring you in the face—like moving to a new city, changing jobs, or planning your next vacation. But most of us don’t consider opportunity cost in our decision-making process for the majority of our decisions.

We know money is not infinite, but we often treat time, energy, and attention as if they are. Your time is limited. If you choose to spend an hour on something, you can’t use it for anything else, so making smart decisions about your time is critical.

Do you stop to consider multiple scenarios of how you could spend your time before scheduling a meeting, attending a conference, pursuing a potential customer, or deciding to build a new product feature?

What are the costs of spending too much time on nonessential busy work? Such as cleaning up your email inbox or spending time in non-essential meetings.

What are the costs of signing a contract with a customer? Are there higher-value clients you won’t be able to serve because you’re too busy serving a lower-value customer? You want to choose your customers carefully.

One of the most extreme examples of opportunity cost is the decision to start a company. I love creating and building businesses. But startups require a tremendous commitment of time and energy. The potential rewards are large if you succeed, but the opportunity cost is huge if you fail. If you’re an employee of a company and the business isn’t doing well, it’s much easier to go to work somewhere else. It’s worth it to start your own company. But you should consider the opportunity cost before jumping in blindly.

Here are a few useful ways to consider opportunity cost.

  1. Do fewer things better. Tradeoffs imply that in order to become good at a few things, you’ll be mediocre at a bunch of other things. That’s okay. Focus on being excellent at a handful of things and consider dropping or outsourcing some of the other stuff. Doing fewer things also allows for breathing room. If you’re too busy, you could miss out on great opportunities. But it’s also hard to say no to good opportunities. Be ruthless and say no to almost everything. This frees up time and creates space to pursue a great opportunity.
  2. Create a minimum of three imagined scenarios. For important decisions, develop at least three different potential solutions or scenarios with a detailed list of benefits and consequences for each scenario. Consider not only what you’ll gain from each scenario, but also what you will lose. Assume each scenario is wrong. Try to disprove them!
  3. Choose a high aspirational hourly rate for yourself. No one values your time more than you do. Your aspirational hourly rate doesn’t have to be consistent with what the market is paying you today. Factor it into every decision. I set my hourly rate at $1,000 an hour. This usually forces me to outsource most things so I can focus my time and mental energy on higher-value work. This means delegating tasks whenever possible and minimizing time doing busy work, errands, and household chores. Having a $1,000-per-hour opportunity cost helps motivate me to focus on what’s important.


Sign up to receive new posts in your inbox