Two Cents

(host) "Two roads diverged in a wood, "and I, I took the one less traveled by, And that has made all the difference."

Ooh, I love Robert Frost.

Is that his anthology of poetry?

Nope.

An economics book.

Economics?

Oh, were talking about opportunity costs, aren't we?

Why, have you got something better to do?

[whimsical music] [coins clattering] (host 2) Vic is a food server at an upscale restaurant.

He gets a call from his friend Ben who has an extra ticket to the My Chemical Romance reunion tour!

Though Ben paid $60 for the ticket, he's willing to sell it to Vic for 40.

Since it's his second favorite band, Vic would happily pay twice that.

So he gets someone to cover his shift and they split an Uber to the concert.

Unfortunately, Vic ends up missing almost half the show waiting in the beer line, where he spends another $20.

And the seats aren't even that great.

As he cranes his neck to see the stage, Vic can't help but calculate how much this mediocre night cost him.

Before you bother doing the math, you might notice there's something missing: the work shift Vic gave up to go to the concert.

Since he typically makes about $150 in wages and tips on a Friday night, he would actually be $220 richer if he had skipped the concert and gone to work instead.

This is an example of what economists call opportunity cost, which is typically defined as "the benefit that is missed or given up by choosing one alternative over another."

And it doesn't just apply to money.

If you decide to eat at a Chinese restaurant instead of a Mexican one, you might enjoy the kung pao chicken, but it's at the cost of not enjoying a plate of enchiladas.

Life is full of such forks in the road.

You--and your wallet-- can't be in two places at one time, so we're constantly faced with decisions about where to put our time and money.

The concept of opportunity cost encourages you to look far down both paths and compare all the ramifications of each option.

This may seem like common sense to you, but you'd be surprised how often it's overlooked when making financial decisions.

(host 2) For example, Angela is deciding whether or not to take out loans to go to college.

She does some research and finds that the median yearly income gap between high school and college graduates is around $17,500.

Even if her loan payments are $7,000 a year-- well above average-- she'd still be way ahead!

She decides to take out the loans.

(host 2) While cleaning out his parents' cellar, Ted finds an old bottle of wine, and his parents let him keep it for his trouble.

It turns out to be a pretty expensive vintage, so that night Ted and his boyfriend enjoy a fancy bottle of cabernet with their dinner-- for free!

(host 2) Pamela is looking for a place to rent and finds a great deal on a nice house with a big backyard.

The catch?

It's outside the public transportation system, so she'll have to lease a car to commute to work.

But she calculates that even including car payments, gas, and insurance, she'll still pay less than if she lived downtown.

In each of these cases, the decision-makers have failed to properly weigh the opportunity costs of their choices.

If Angela goes to college, she may make more money down the road, but she will miss out on four years of salary, and job experience, that she would have gotten with a full-time job.

That cab may seem free to Ted, but it's actually costing him $100 not to sell it.

And Pamela has overlooked the amount of time she'll spend in the car, which she could otherwise use to relax, pursue hobbies, or make more money.

To be clear, that doesn't mean their decisions were necessarily wrong, just that they didn't have a full picture of what they were giving up.

Opportunity costs are especially relevant to people in business or government, where shareholders and political opponents are more than happy to imagine how that money could have been better used.

If an executive wants to spend $10 million on a marketing campaign, he has to show that not only will it return a profit, but that it will return more of a profit than any other use of that money, like renovating a factory or developing a new product.

If a city council wants to build a rec center, it's not enough to say it will benefit the community.

It has to create a larger benefit than if the money were used for any other purpose, like education or housing.

Opportunity costs are also a key concept behind specialization, which means focusing on a smaller scope of production to increase efficiency.

For instance, Elon owns two factories.

Factory A can produce 50 electric cars in one day, and Factory B can produce 40.

But if they switch production over to his new Cybertruck, both factories have the same daily output: 20.

This means that every Cybertruck Factory A makes comes at an opportunity cost of 2.5 electric cars not made.

Elon decides to have Factory B produce all his Cybertrucks, because the opportunity cost is lower.

Even if you're not an auto executive or a city councilmember, taking a moment to weigh opportunity costs before a decision will make you a more competent CFO of your own life.

It's also a good reminder that money is fungible.

Every dollar you spend in one place could theoretically be spent anywhere else.

But it's important to remember that opportunity costs refer to all benefits-- not just financial ones.

The experience of college life, the comfort of a spacious house, and the emotional satisfaction of treating yourself are hard to put on a balance sheet, but the benefits are no less real.

(host 1) Even Vic had no way of knowing that the night would be a bust.

If he had skipped the show and worked his shift instead, he might've ended up kicking himself over the opportunity cost of missing what he imagined to be the greatest concert of all time.

You can see how thinking too much about opportunity costs can send you down a rabbit hole of infinite possibilities and regrets.

You can go crazy trying to weigh every conceivable pro and con of every conceivable decision.

It's good to remember that big life decisions are often more like forks in the road than a vast, infinite ocean.

You're usually only deciding between a manageable number of options, and it's best to always face forward, not second-guess where you've been.

(both) And that's our two cents!