Tuesday, April 19, 2011

Opportunity Cost

According to Wikipedia, opportunity cost is the cost related to the second best choice available to someone who has picked among several mutually exclusive choices. What this means for everyday people (rather than economists) is that for almost every choice you make, you give up something (that you consider to be second best). For example, when you decide to stay up late playing video games, you decide that playing video games is the best use of your time, and sleeping is the second best. This is a simple example, and it's easy to follow because we're working on the hour scale. Opportunity cost applies to just about anything. The trade off doesn't have to be as simple as time spent on one thing vs time spent on another, it can be time vs money spent, or experience vs relationship. I bring this up, because I've been thinking about how to spend my money lately. I could put a few grand in a Roth IRA and have a bunch of money when I retire to do whatever I want with, or I can spend it on what I want right now (musical instruments) and make music. The thing is if I save my money now, when I retire I'll be able to buy the musical instruments I want now along with many other things, so what exactly is the opportunity cost of putting my money in a retirement account? Well, I'd say the biggest thing I'd be giving up is not the physical instruments but the ability to create music with them. By waiting to buy the instruments later in life, I'm giving up the music I would have made, which is a very large opportunity cost in my opinion. Every time you make a choice it might be a good idea to consider what you are forfeiting by making that choice, but be careful to consider more than the obvious. Sometimes the biggest thing you are giving up isn't money or time, but experience.

I mentioned before that I play guitar. I also play drums, bass, and piano to a lesser extent. I can sing fairly decently if I stay within my range (but where's the fun in that?). I'd like to learn how to play violin, saxophone, sitar, and accordion. Unfortunately these instruments aren't cheap. I'll post some videos of me shredding some other time. Until then, thanks for reading.

~Cheers

5 comments:

  1. I'm well aware of Opportunity Cost, sadly I tend to go with short term benefit over long term again. Going to the pub rather than staying home to study.....

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  2. nice thoughts. I look forward to your videos,

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  3. Fenix, what kind of music are you into?

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  4. Sometimes there are hidden costs, like happiness, and no one can actually measure them

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  5. I agree with you Lich, but I see happiness as something else, sort of tied into the idea of opportunity cost at this level. When you make any decision you base it on what you think will make you happier. I think happiness exists in the background of choices. For instance, the first example I used "when you decide to stay up late playing video games, you decide that playing video games is the best use of your time, and sleeping is the second best" You've decided that playing video games will make you happier than sleeping. So yes, I guess happiness is what we are looking at in every single instance of choice (and opportunity cost).

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