In our day-to-day lives, we make a lot of tradeoffs. Whether implicit or explicit, we are constantly choosing what we want to do and who we want to become. This is what I like to call the ‘tyranny of tradeoffs’ and is underpinned by the concept of scarcity and constraints, ultimately culminating in opportunity costs.
Opportunity costs seem like a dry and sterile topic from economics 101 and something you might not use after learning it. Yet in reality, the concept permeates through every decision and most actions we take.
In essence, the concept of opportunity costs is the art of managing scarcity, which as a human, is what we deal with as constrained creatures. In other words - being that we can’t be everywhere at once and complete all the things we want to, we have to manage our time, money, and resources.
As much as we want to outsource the job of managing scarcity, making tradeoffs, and calculating opportunity costs, we usually can’t. That’s because we’re personally faced with multiple options all the time, and we inevitably have to choose and in the process, we have to lose one to get the other.
Even though, knowing you're forced to make these tradeoffs can be an intimidating fact and having too many options can create option anxiety, there's a way to approach each decision moment by rapidly assessing the expected value of opportunity costs.
Here is a question framework I like to ask myself to qualitatively make the right tradeoffs, it’s what I like to call options trading.
Assessing the characteristics and constraints of each opportunity - what are the pros/cons, time/financial costs, impact?
Starting here helps me texturize the options so I can compare/contrast them as I go through a deeper set of questions.
Assessing trade-offs and costs - What am I going to lose by doing one option over another?
A basic and powerful question helps me quickly enumerate all the things I’m losing out on when making a decision. It brings loss to the forefront, which is what is the essence of the opportunity cost.
Assessing long-term implications - If I do take this route, how does it affect my long-term prospects?
This question helps me to contextualize the long-term effects of the options. In all options, there's always a quick route to victory. Yet, those routes tend to be short-sighted and often leave you in a challenging situation when you’re thinking about long-term value.
A short example of this is when I recently had to work cross-functionally to decide which payments architecture we should use to collect payments for a new product we are launching.
Before diving in, a few preceding assumptions are that you’ve done a good job doing the following:
Defining the problem/opportunity space
You’ve explicitly defined your options
You have some guiding principles that help you make tradeoffs in the context of your business and shape your solution
With this in mind, below is my opportunity cost framework (I’ve abstracted away key details):
I made it look easy and quick, but options trading takes time and diligence in practice. The key is truly understanding all your options and explicitly stating all the tradeoffs you’ll be making.
To help you better along your journey to becoming a trader, I created this template that you can reuse as you consider opportunity costs for yourself.
Drop me a line if you think it’s helpful!
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