When I took my MBA and DBA, I came upon this principle which an accountant, financial or economic analyst should know. It's called "opportunity cost."
As defined by Stephen L. Slavin in his book "Microeconomics", the thing we give up, (i.e. our second choice) is called the opportunity cost of our choice. Therefore, the opportunity cost of any choice is the foregone value of the next best alternative.
There are a lot of ways of using this principle. For example, I am connected with a virtual freelance consultancy where I earn at least $100 a week, granting that I do not leave the house and do not spend money on gasoline or transportation. Once I start meeting my other clients outside my virtual freelance consultancy for a week, my opportunity cost will be $100 for such week, as I have this foregone value of the next best alternative. Consequently, I have to make sure that the earnings I derive from my clients outside my virtual freelance consultancy be more than (or at least equal to) the fees I will collecting should I have been working on my virtual freelance consultancy during such week.
What lesson can you derive from using the principle of "opportunity cost"? It simply means that when you make a major decision in life, make sure that it is worthwhile with a quantifiable value in mind. You should never make choices based on emotions or instinct alone, otherwise you might experience an opportunity loss in economics. Therefore, you must always have a quantifiable basis in making a huge decision in life.
I know a friend of mine who had a lot of job offers. He usually decides the best choice after plotting the pros and cons through a matrix of percentage criteria or a SWOT analysis for every job offer. It sounds really profound and weird if you are to present this to a layman. But what he does in his life makes him stable and successful in his career.
On the other hand, financial analysts or entrepreneurs make huge decisions in their companies after considering the risks involved. But I doubt if they decide based on instinct alone; they also decide on the basis of a calculated risk assessment.
There are a lot of people out there who just decide on pure emotions without any calculated assessment in mind. Man is created as a rational being; it's time to use that gift in making decisions in life.
Just to add to your interesting blog post, opportunity costs also apply to the shots you DON'T take, either because your are ill-equipped at the time to take it, or you're not confident enough to succeed. It's a 100% loss either way. It behooves us all to invest in our own education and to sharpen our skills in order to take good opportunities that come our way.
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