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Leadership & Management
A World of Tradeoffs: Consider your Opportunity Costs
Mohammed Siddiqui
October 13, 2021·4 min read
I didn’t expect to remember much from the Economics courses I took in university when I started my first job in a completely unrelated industry.
However, from both firsthand experience and observation, I'm starting to understand the importance of opportunity costs and prioritizing what is important.
Rather than discuss my own limited experience, I’ll throw you a hypothetical.
Here’s a sample situation.
You’re a key decision-maker at a fast-growing startup. Your sales team is hounding you for several new features to sell bigger deals and make significant inroads in a new market. Your engineering team reminds you of the tech debt and bugs they need to address, while your Customer Success and Support teams are raising their voices about customers threatening to churn because you don’t have features A, B, or C. You have a finite number of developers and need to decide which projects get worked and which get moved into the ‘backlog’, a murky depth where ideas usually go to die.
What do you focus on?
This is a bit of an extreme example and also not applicable for most of us. But I hope it gets the following point across: we are finite beings with finite time, labor, bandwidth, and resources.
This is true in our personal lives and careers.
Yet, despite the limited resources available to us, our lives are filled up with commitments, events, deadlines, requests, activities, and outcomes which we must address.
There is no shortage of literature on time management, productivity hacks, improving efficiencies, and increasing output.
However, no matter how much more efficient you — or your team — can become, you’ll need to accept the inevitable truth: not everything you desire to complete will get done.
This is where you need to prioritize.
In the situation presented at the beginning, you’ll need some method of determining how to best resource the individual problems your company needs to solve.
To deal with this in the corporate world, practitioners across disciplines have developed decision-making frameworks and tools.
Product Managers, for example, leverage aptly called ‘prioritization frameworks’ such as RICE scoring to develop their product roadmap.
More broadly, when you’re faced with constraints, you’ll need some method of comparing options to determine which is the best path to go down. This is where students of economics and decision sciences have a leg up above the rest. Starting with a position of unlimited desires and limited resources to service them sets one in the correct mental space.
The next step is evaluating options and their outcomes. This should factor in the proposed benefits of choosing a specific option as well as the ‘opportunity cost’ of not choosing another option.
Per Investopedia, opportunity costs are the quantitative benefit you forego when you choose an option that another option would have provided. They’re known as such because they are often ‘hidden’.
For example, if you were to decide between making a $1000 investment with a 5% annual yield and spending the $1000 now, your cost isn’t just the $1000, but also the dollars you would have otherwise earned had you invested.
While business and economics decision-makers measure costs and benefits using dollars, utility, or yield, in situations less easily quantifiable, you can note down the pros and cons of choosing or not choosing each option before attempting to translate statements into some common metric to compare apples to apples.
This is a way of thinking I am still trying to grasp. It’s often difficult, as the day-to-day grind us down from our 20,000-foot perch, whether at work or in life. Additionally, we're wired to think about the tangibles and ‘the seen’. Comparing the would haves is an extra step.
Today, although infinite possibilities are a few finger taps away, limited bandwidth prevents us from ever fully exploring the vast sea of possibilities open before us.
The next time you’re faced with making an important decision, whether at work or in your personal life, consider evaluating your opportunity costs.
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Studied Business and International Relations at Carnegie Mellon. Interested in geopolitics, political economy, technological innovation, markets, international development, and consumer trends. I enjoy investing, working out, and drinking Raspberry Hot Chocolate.