How “Opportunity Cost” Influences Our Major Life Decisions?

Jan 24, 2017 9:15 IST 1474 views

Opportunity cost is part and parcel of your life.

While making a choice between multiple options, Opportunity Cost plays a decisive role. How?

Let me elucidate this with an example - You have both an orange and an apple. If you choose an apple to an orange, then your opportunity cost is the orange. So, this can be described as something - “the value of the opportunity lost”.

In business economics, “Opportunity Cost” means profit, benefit or value of something that must be given up to acquire or achieve something else. (Source: www.businessdictionary.com).

In this context, we would cite the law of sacrifice - To be successful in something, you should give up something.

All of us want to make sound economic decisions in our life. You get options - and you select the better one.

Isn’t it?

How do you go ahead with the selection? You select your preference after analysing the opportunity cost (consciously or unconsciously).

The process of accepting something and rejecting something ultimately boils down to your preferences.

Quoting the initials of one of the most famous dialogs of “3 idiots”: “Life is a race..

Rajkumar Hirani didn’t relate life with a game of cricket. Instead, he did it with a race.

Ever wondered why?

Cricket starts with a toss which decides whether you’ll bat first or field. It is not your preference, It is not your decision to make after all!

A race, on the other hand, starts with a sound of a fired bullet. You do not wait for the other parties to decide anything for you. You just run as you preferred running freely over a toss of coin – on which you don’t really have a control.

Similarly, while making decisions in life, you are saying to yourself, “I prefer this and that’s why I selected the same.”

Real Estate and Opportunity Cost

It is paradoxical that few people who invest in real estate comprehend the concept, “Opportunity Cost”.

Along with profit, keep into consideration the opportunity cost of the property.

Let me elucidate further citing an example Rent VS Home Loan

Let’s take an example of person A and person B -

A started paying a house rent of Rs 2,16,000 p.a. (18,000 per month) for a property worth Rs 70 lakh. The rent increases at the rate of 10% p.a. so the rent becomes Rs 2,37,000 next year. Likewise that the rent increases at the same rate years after years.

B is paying Rs 6,000,00 (50,000 per month) as EMI on an annual basis. And the EMI remains same for say 15 years.

As you can clearly see in the graph, the point of intersection comes after 11 years. And, after 15 years, B becomes the owner of the property but A still remains paying the rent for the property.

Factors Deciding Opportunity Cost -

Different people make different decisions and these decisions are influenced by their terms of enjoyment, emotional impact, monetary benefit or whatever feeds to their sense of satisfaction.

You choose something which comes with the greatest benefit at lowest cost! And this is done only after analyzing the opportunity cost consciously..

It is human psychology that we want to mitigate the opportunity costs.

Accordingly, chalk out your strategy, calculate the benefits, opportunity costs and then make a perfect decision for you and your loved ones.

Know more about Home Loan a Worth Decision

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