#100 Thinking in opportunity costs

Have you thought of what you’re giving up?

Intrinsic motivation in a species is said to be correlated to the size of the brain relative to the body. Bigger the brain relative to the body, more driven is the species to exercise it for fun or for challenging pursuits. That explains the curiosity of our species compared to others. If we aren’t curious, this metabolically expensive ability is just excess brain baggage. 

This newsletter started as an exercise in curiosity. Are there others, I have greedily thought since, for whom learning is its own reward? What I’ve come to conclude after a hundred spins of the wheel is that when it comes to catching the curious eye, there’s no risk in the market. People are and will always be willing to be entertained, educated, empowered. There’s only a risk in the product—my product. Can I do it better? Can I do it uniquely? 

And I’ve come to believe that there’s no destination I want to reach. There’s only the pursuit that I wish to enjoy. 

Let’s kick off the 100th issue of Curiosity > Certainty with the top takeaways of this week:

1. In popular culture, quitting is an unpopular strategy.

2. If our parents were optimists, we’re opportunists. That is because they lived in an age of scarcity. We (increasingly) live in abundance.

3. The cost of giving up the next best alternative to what you're doing today does not come printed on your paycheck. You’ve to go looking for it.

4. Even when you know the opportunity cost, you may not be spurred to do anything to reduce it. The difference between knowing and doing is sunk costs, endowment effect, and status quo bias. 

5. Those who don’t think in the currency of opportunities may do a lot but not get anywhere meaningful. Those who do tend to find their way to continued success.

Telling people to quit as a strategy is waging a war against convention. 

It is not just that success stories of grit and persistence are the most celebrated in popular culture but also that dropping out midway is looked at as a weakness. 

Winners don’t quit, and quitters don’t win. If quitters are such losers, here’s something to think about.

You change jobs when it becomes less fulfilling. You change jobs when it becomes boring. Why don’t you change jobs when your current one remains the same but other jobs in the world outside become more interesting and fulfilling? 

If the difference between what you have and what you could have is all that matters, then you should change jobs in either scenario. You should be just as likely to change jobs if the best alternative to your current job becomes better. 

Very few look at the decision to quit or stick through this frame of opportunity costs. Few ask: What am I missing out on by continuing with what I’m doing now? 

I use jobs as an example because it is easy to relate to. My point applies to any meaningful choice, personal or professional. 

You could just as well apply opportunity-cost thinking to how you spend your time. Any manager in a decision-making position has several things competing for their time. How should they choose? Should they pick a task that simply brings a positive return on their investment of time? Or should they do that thing that promises the highest value on their time investment? To even consider this choice, they should be first aware of their opportunity set. But are they? 

A story about opportunity costs

Here’s a tiny tale. Even though I’ve known it for a while now, listening to it recently within an opportunity-cost frame switched on a light bulb in me. Here’s what I heard, word for word, on Hidden Brain:

‘Back in the 1990s a young guy was working at a company called D.E. Shaw, and they asked him to work on Internet stuff and he found that the business he was building was growing astronomically…and, you know, most people would’ve said, Okay, this is my ticket to stardom at this company. I’ve the inside track to run the place in a few years.  But this kid didn’t do that. He quit his high-paying job and launched a little start-up selling books online. And it wasn’t that working at a high-flying job for D.E. Shaw was bad but the opportunity cost of not founding…’

Well, you know how this story ended. I imagine Bezos would’ve found something like this back in his D.E. Shaw days. Somehow, don’t ask me why, I can imagine him returning home from work, his head spinning, his eyes glassy from having spotted some sure-as-day pattern like this below. 

Here’s what I want to say though: On any day your opportunity cost isn’t printed on your vision board in front of you. Nor does it appear in your inbox, marked urgent. You have to go looking for it. 

Once you go looking, you realize it’s a heady cocktail of things throwing you off the opportunity-cost trail.

My physio who’s a gun at her job

My physiotherapist, who’s a gun at her job, has an elliptical cycle that keeps breaking down. She keeps having it fixed. Pedals, gears, whatnot.

I tried to explain to her what I thought the problem was. But I said nothing about sunk costs.

I asked, Say your clinic is taken over by another physiotherapist who has no idea about the money and time already put into the cycle. What would that physio do about the cycle? That made her think. He would probably get a new one, she replied.

What’s stopping my physio from doing so herself is the pull of the past. She’s not alone. All the things that you decided at one point in life to pursue keep pulling you back to them because otherwise what’s the point of all that time and money and effort expended.

In many ways, the past you is holding hostage the future you. You are beholden to your former self. So, you let things be as they are. But continuing with the broken cycle is also making a decision. It is deciding to stick to the status quo. 

I’m pretty sure if I had asked her how much the cycle was worth she would have quoted a number that in the market would’ve been off by an order of magnitude. That’s endowment effect. We irrationally value the things we own a lot more than what it actually is. If you've tried to sell a piece of used furniture you would know this. If you've ever bought a piece of used furniture you would know this too, just on the other side. 

Before my session was over, I asked my physio, without saying opportunity costs, What do you think you're losing out on by continuing with the broken cycle? She said customers may see it as she's running a broken shop, may hesitate to return to her, et cetera. 

Yet, she had decided by an act of omission to let go of opportunities the future would bring her. 

Is life too long or is it too short?

I opened this piece with a contrarian view: consider quitting. Consider quitting not just when the going gets tough for you, but the going gets better in the world outside while things may be the same for you. I also likened quitting as a strategy to waging a war against popular culture. Why is that the case?

We’re moving from an age of scarcity into an age of abundance. But we haven’t updated our worldview. This is causing trouble. Let me explain.

In an age of scarcity, positive thinking and optimism are great assets. They draw focus on the silver lining and make us gritty and persevering.

In an age of abundance, the quality of being able to think through what you're giving up while making a choice is invaluable. Because there are far too many options than you have time to try, it helps to be constantly evaluating your positions and quitting things if needed.

When I posted this framing of abundance versus scarcity earlier in the week, a couple of parents responded with an acknowledgement and, what I gathered to be, a sense of bewilderment about the mushrooming of options today for their children.

The difference is between a Life’s Too Long and a Life’s Too Short philosophy. 

My parents thought life was too long so you got to stick to things and make them better. They could not be opportunistic because opportunities were hard to come by. My daughter is not yet three. I hope the zeitgeist propels her to think that life’s too short and there’s no point holding on to dead weight. What will have changed? The mindset, of course. But the shift in mindset is an epiphenomenon. What’s behind it?

Read this hilarious and incisive take the other day: ‘Earlier people used to worry about ensuring that their children are fed and do not go to bed on an empty stomach. Today we worry about ensuring all our devices are put on charge before going to bed.’

The difference is between scarcity and abundance. The driver for change is abundance.

This difference in bedtime worries can have much bigger stakes. Let’s use culture as a filter here. Indians are not known to stinge on education (or weddings). It is normal for Indian parents to invest a fat chunk of their incomes into an overseas postgrad or MBA fund. It is normal for them to make big lifestyle and career sacrifices to give their child the best education. But what if the child sees it differently? What if she wants to explore and not commit to a narrow path because her parents had given up too much to carve out that path for their dear child? 

The problem here is that parents and children would be looking at reality through opposite frames, mostly without realizing so. One would be living in a world of scarcity, the other in a world of abundance. 

For the parents, life’s too long. For the kids, life’s too short.  

Our generation will see the next as fickle, giving up too easily and not sticking it out. The next generation will wonder why their parents are so pigheaded about things, why they can’t see that the world is full of better/more options.

The highest-currency stories in popular culture will perhaps not be some legendary war story of perseverance but be about a founder who dropped a cherished project, returned precious capital to investors, and went on to do bigger things. 

Considering the opportunity cost helps us cut our losses and realize potential gains that would otherwise go unnoticed. This is true whether you’re debating the fate of an investment, a career, a job, a business, or an exercise bike. 

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Several friends, mentors, and teachers have helped me along the way to #100. Without them, this ride wouldn’t have been as meaningful or fun. Thank you, Atul, Mayank, Pritesh, Sujay, Innu, Nishant, Sourav, Sandeep, Annie, and Farnam Street.

And thank you, dear reader, for making time for me. I hope this has been useful for you. I love hearing from you. Leave a comment.