Opportunity Costs

Supported by Greenhaven Road Capital, finding value off the beaten path.

“The cost of one modern heavy bomber is a modern brick school in more than thirty cities.” When Dwight Eisenhower gave his farewell address in 1961 he warned against the military industrial complex and vividly laid out what else we might spend the money on.

In the paper, Opportunity Cost Neglect a trio of Yale professors and two others commend Eisenhower for his language. Most people are vaguely aware of opportunity cost, and its calculations aren’t difficult, yet unless the costs are vivid and explicit we won’t weigh the decision.

One of the paper’s authors wrote:

“This customer was frozen in indecision between a $1,000 Pioneer and a $700 Sony, and the salesman intervened, framing the choice as follows: ‘Well, think of it this way—would you rather have the Pioneer or the Sony and $300 worth of CDs?’ Remarkably, the decision that seemed so difficult just moments before was no longer even close—the Sony was at the cash register moments after the word CDs escaped the salesman’s mouth. A big pile of new CDs seemed far too steep a price to pay for the Pioneer’s slightly more attractive speakers.”

In a recent podcast, Rory Sutherland put it this way:

“I made the decision to underspend on property on the grounds that nearly everybody else was effectively maxing themselves out. The default behavior of housing was to buy as much as you can borrow. That assumes the greatest return on happiness comes from property expenditure. No one really looks at the opportunity cost. If you’ve got a massive mortgage there’s a holiday you can’t take there are children you can’t educate.”

When considering a purchase try to be creative when what else you could buy.

  • It’s not just Apple or Samsung.
  • It’s Apple or Samsung or ‘dumb’ phone and two-months of groceries.

Actually, the authors note, if the alternative isn’t exciting or enticing people tend not to choose it. A better comparison might be a ‘dumb’ phone and a new television.

 

Thanks for reading and watching.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.