Alternative Cost
Notes
Alternative cost is the idea that every choice we make has an additional cost when taking into consideration the choices that we didn't make because of that FOMO. Time, money, attention, all are scarce resources, so choosing one thing necessarily forces us to abandon other choices.
For example, let's say you are a freelancer, and you are considering going on a vacation. When you ask yourself what is the cost of the vacation, you add the cost of the flight, housing and all other expenses and get to 10K. However, there are additional costs you haven't considered. By going on a vacation and not working on that week, you're losing potential projects that are worth 2K, therefore the total cost of the vacation is actually 12K.
In some sense. it involves prediction because it is always about the Counterfactual, about "what if" we didn't do x and did y instead. Alternative cost is very difficult to calculate and even think about because it is much less tangible than the action we are considering doing McNamara Fallacy. For example, it is very easy to see and feel the direct costs of the vacation, but how many new projects will I miss for not being available this week?
When Planning a project, always be mindful of these costs. A good way to detect such causes is to Zoom out and think about the project on a grander scale, one that also involves alternatives to it. It will also help us escape the power of Path Dependence that pushes us towards certain decisions, as if alternatives are not possible or relevant.
Thinking about alternative costs can weaken the effects of other costs such as Sunk Cost, because you won't just take into consideration the costs that you are about to pay or have already payed, but also those that you will miss by making this decision. Alternative costs can also help us avoid cases of Perfectionism because the Diminishing Returns from further improving our output will be less than the value we can get from other decisions.
Value
Overview
🔼Topic:: Economics (MOC) 🔼Topic:: Decision Making (MOC) ◀Origin:: 🔗Link::