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A New Year, New You?
So many of us use the turning of the year to reflect, consider and set goals for our future selves. And this is great – a cyclical prompt to help us be intentional with our time and resources. But there is something really important to weigh up when thinking about the year ahead.
Sometimes, it's too easy to just run with an idea or let things go as our motivation wanes (particularly after a whopper of a year or two!), not really thinking about the impact of this – something called 'opportunity cost'. Never heard of the term? Then you're in the right place :)
What is opportunity cost?
Opportunity cost is an economic term that considers the value of the options not taken, when making a choice. This can be particularly obvious when resources are scarce – like time or money. Making a choice to spend these resources in one way is forgoing the benefit or value of using them in another – that is your opportunity cost.
Here are some real-life examples of opportunity costs:
The opportunity cost of buying a new car can involve many more years of renting a home before purchasing your own home; or, the opportunity cost could be not investing that money elsewhere instead.
Choosing screen time for an hour includes the opportunity cost of what you are choosing not to do instead - such as this reading, writing, exercising or resting.
Deciding to study your masters can at times include an opportunity cost of reduced social outings when exams and assignments are due.
Choosing to spend your holidays in the same place every year includes the opportunity cost of not exploring new and different destinations.
How does opportunity cost help with decision-making?
When making little and big decisions – like what to eat for lunch or whether to change careers – we are used to weighing these decisions up with familiar concepts, such as a pros and cons list. Factoring in opportunity cost can help to highlight the effects of our decision, by consideration of the ‘roads not travelled’.
If you choose to get takeaway rather than eat your packed lunch, the opportunity cost can include not just the money paid, but also the discarding of time spent preparing the lunch as well as the nutritional value of homemade vs commercially made food. By the same token, getting takeaway can be healthier than what you may have packed yourself, and it can save you time preparing food in te kitchen.
Equally, for a big life decision like changing careers, the opportunity cost might include many years of reduced income in order to study, and time not spent with partners or children whilst study commitments are focused on. It could mean declining promotions in your current role due to study commitments, and forgoing increased income when shifting fields and entering at a base level.
This is how opportunity cost helps us make decisions, by helping us to understand the true cost of what is involved and if it is worth it.
Why should opportunity cost matter to you?
The thing with concepts such as these, is that once you see them, it is hard to un-see them. Try looking back on recent decisions and considering the opportunity cost – both of your time or money, and see if your perception of these decisions shift or change:
Would you still make the same choices again?
Were the opportunity costs you took aligned with your values?
Or does this feel uncomfortable now that you can more clearly identify what a decision cost you?
Look further back into your childhood, where our values are often instilled in us:
Can you see the opportunity cost of decisions your parents made for you and how you spent your time – both individually and as a family
As Gretchen Rubin states in her article on Psychology Today,
“Opportunity cost is an important issue in the context of children’s time. If your child is taking piano, he isn’t drawing. If she’s reading, she’s not playing soccer. It’s easy to ignore the opportunity costs of children’s activities and to undervalue children’s time – and in particular, their free time…. Shouldn’t they be getting the most out of their time? Shouldn’t they be learning things now, that they’ll be happy to know, later?
Yes…but. When I think about my childhood, I wonder if I didn’t get the most value out of the time I spent goofing around. It was valuable to play sports (which I hated) and to take guitar (which I hated), true. But what was the opportunity cost of the time I spent doing those things? What other activities would I have done? That’s unknowable.”
How to get better at making decisions using opportunity cost this year
Setting realistic and achievable goals is part of helping ourselves move towards where we want to be in life. All of this will involve opportunity cost. It is about deciding which costs we value and accept, and which ones we want to move away from.
If you don’t set yourself a goal for the new year (or any other time in the future), what are you really costing yourself?
It isn’t just the lack of the goal achieved (for example, running a triathlon), it is the cost of also the little and big emotional gains along the way – enjoyment, satisfaction, confidence, a sense of wellness and prioritising of your time and energy towards meaningful activities. Goals help us to carve out who we want to be through pursuing how we spend our time. What is your opportunity cost, by not taking action towards your goals this year?
How to not ruminate on opportunity costs
Opportunity cost has the potential to be paralysing. Considering all the ‘what ifs’ and trying to equate value to all the different options can be exhausting - and can lead us to NOT make any choices at all. This analysis paralysis can leave us stuck – and making big opportunity costs by not moving forward in any direction at all.
This is where self-knowledge is essential.
Knowing your values will help to guide you in your decision making – especially when the opportunity costs seem high. It might be in line with your values and so you decide: it’s worth it. After considering the opportunity costs, if you still want to pursue it, you are likely going to value the outcome highly.
Wishing you’d chosen differently?
Don’t let the ‘what ifs’ of opportunity cost get to you – you made the best decision for yourself at that point in time, with what you knew and where you were at. As you grow and change and learn more about yourself, you might make different decisions and that is ok.
You can’t change past opportunity costs, and while you might not make the same decisions today, it is important to also consider the value that making those choices has given to you – enjoyment, security, new connections or, at the very least, a better understanding of yourself. But there's one last thing you should know:
Your opportunity cost is unique
Don’t rely on someone else’s opinion when thinking about your opportunity cost – their value of money or time will be different to yours. Coming back to your values is key. If you consider yourself someone who prioritises family first, then this will always factor into your opportunity costs and you should act in alignment with it i.e., choosing to give up a successful business position or move to a fringe position on the board rather than continue to act as the CEO, in order to spend more time with your family.
Your opportunity cost might be further economic gains or business connections, however your priority of acting in line with your family means you don’t miss out on birthdays or weekends with them. Instead, your goal has been achieved and is in line with your values, therefore this opportunity cost does not matter to you.
This might be abhorrent to someone who values career success, and would make the opposite decision – perhaps to travel (and miss out on family events) in order to further succeed in their chosen field.
So, as we start a new lap around the sun, consider the goals you are setting yourself this year and the opportunity cost of these.
If they align with your values, you are likely on the right track. And if not? Time for some reflection and adjustment to ensure you are working towards a life that you truly desire.
Every choice we make has an opportunity cost – the important thing is to still make a choice and move forward acknowledging this. By being aware you will continue to improve your self-knowledge, set better goals and help yourself stay on track (self-regulate), even when the opportunity costs are high.
Hayley
PS: Do you need some help weighing up your opportunity costs, identifying your values and working towards a goal that you would love to achieve in 2022? Then join our next FRESH START cohort for support and encouragement to reach your goals.
And if you are after some motivation and inspiration in the meantime, come and Dr Maike Neuhaus on Instagram. And don’t forget to sign up to the monthly newsletter, and get free access to the most recent free self-leadership resource.