Monday, April 2, 2007

Opportunity cost and the Idiot box

Classes have begun! My first two courses: Managerial Economics and Financial Accounting....good stuff....excellent insights into how microeconomics and financial information shape the performance of a manager....and this is just the 1st week (damn excited about how this is gonna go!)

Anyways, one very important concept that I came across in the economics class was Opportunity Cost.

Consider that you have multiple choices of action, and you decide to pick a certain (probably the best) action for yourself or your company. The opportunity cost is the sum of the costs involved in taking your chosen action (an explicit cost since you know how much your resources will be used) and the cost of dropping all the other choices (an implicit cost that evaluates how much you would have gained from you other choices). Opportunity cost is an important component of understanding the actual economics cost involved in any decision and is a great tool to plan things ahead.

While I was pondering over good examples of its relevance, the one that stood out was 'time spent on the Idiot box'. Most of us watch some kind of TV show that doesn't benefit us in anyway. Soap operas, CSI, Bones are just a few examples of the sheer number of useless shows (think about it...can you really use any information from a CSI case?..they don't even mention any scientific details of their experiments that you could reproduce).

Now if you had several things to do, say reading that blog on personal finance, researching Walmart for your class project or simply playing soccer with your kid, your opportunity cost in letting those go to watch how Kyle (XY) was born, is huge! Each time I watch a TV show now, I actually think about its usefulness to me. Now, watching House or Southpark is definitely good for me.....they are shows that raise my seratonin levels (feel good factor) so they are not a bad deal.
Anyways, the point is not about which shows you should not watch. The point is that at anytime, evaluate the purpose and implications of every task and roughly analyze what opportunity costs lie in doing that task.

Using this concept at a smaller level like everyday stuff might just create an automatic response to major decisions where an analysis of the opportunity costs will benefit you greatly in the long term. This concept is fundamental and I wish I had known this before (I always thought every decision was about accounting profits and costs).

Check out David Allen's 'Getting things done' if you want to learn the approach to choosing the right actions for the movement (he doesn't discuss opportunity cost, but his idea is quite the same)

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