One of the great joys of economics is realizing how applicable it is to the world. The lessons of economics don’t only apply to situations where money changes hands. All kinds of human decision-making can be understood through the ideas of economics. In this way, understanding economics can also help us improve our own decision-making and better reach our goals. One tool I’ve found very useful is the idea of opportunity cost.

Opportunity cost is easy to understand. When you have a choice between A and B, and you choose A over B, then the value of B is your opportunity cost, because by choosing A, you give up the opportunity to acquire B.

To give a more specific example, suppose I’m thinking about buying a PlayStation 5 (assume this is a version of me in a parallel universe, who actually has time to spare for video games). There are currently two models of PS5 available – a $500 version that has a built-in disc drive, and a $400 version that has no disc drive. The more expensive version allows you to play games or watch movies via a physical disc or digital download, whereas the less expensive version only facilitates games and movies through digital download. The price of the disc drive version is $100 higher, but that doesn’t really capture what the additional cost is, in the economically relevant sense. If I spend $500 for the version with a disc drive, I can buy just the console, whereas the same $500 could buy me the digital-only version, plus a couple of games to download to the console as well. So if I choose the version with the disc drive I’ll pay a price that’s $100 higher, it didn’t cost me an extra $100, it cost me the games I might have gotten alongside the purchase of the digital version.

(The above example is a bit oversimplified because it tacitly assumes that my next preferred use of $100 after buying the digital console would be buying games, which doesn’t necessarily have to be the case, but we’ll just toss that assumption in for the sake of simplicity.)

Because every decision we make necessarily entails not making some alternate decision, opportunity cost is ubiquitous. And I think there is an important lesson in this that can help people make better and more informed decisions in life, not just about what to buy, but more generally. My advice would be, when you’re making a decision of significance, you should always make the opportunity cost explicit.

When we decide to undertake a new project or set some new goal, it’s all too easy to consider that goal in isolation. But nothing exists without opportunity cost. Setting that new goal will come at the expense of something else you could be doing, or crowding out something else you are doing currently. The easiest way to make this clear is to ask what the “instead of” is, because everything you do is done instead of something else. For example:

  • I’m going to take some training courses at night to gain this new certification, instead of keeping up on the latest shows on my streaming service.
  • I’m going to go to train to run a Tough Mudder this summer, instead of crossing off more books on my reading list.
  • I’m going to volunteer as a coach for the local Little League this season, instead of working on that bathroom remodel I’ve been planning to do.

In my experience, one of the biggest stumbling blocks people run into when pursuing new goals (or New Year’s Resolutions!) is that they don’t make the opportunity cost explicit. They consider the value of the goal in isolation, without thinking about what they will need to give up in order to achieve it. So my advice is to always take a moment to make the opportunity cost explicit before you set out on a new goal. If you can’t find an “instead of” that you’re willing to act on, it’s a good sign that you should reconsider your goal.