The less common way to decide: looking at opportunity costs

A non-obvious insight I came across this week on Twitter from the erudite Shreyas Doshi:

Decide what to do not based on ROI but on opportunity cost.

Progress leads to motivation. We’re constantly looking for incremental gains because they’re fuel for our actions. Basing our actions on ROI is a clear path to progress. We can answer those emails tonight and have fewer unanswered requests to wake up to in the morning. We can go through the product backlog and pick out a quick win to work on. The template for this behavior goes something like: Spend a little bit of time and solve a problem that gives the appearance of progress but is mostly something that could’ve been avoided in the first place and does not prevent the root problem from surfacing anyway.  

There are two variables in such ROI-based decisions: value created and time spent. ROI thinking draws us toward work that can quickly create some value, any value. It’s like spending a couple of hours at the spa when your lipid levels are through the roof. It may make you feel good but it’s not really moving the needle that matters. 

Opportunity cost forces you to consider the best/optimal option by asking you at the point of decision-making, What are you giving up by doing this? The answer, surprisingly often, is that something of greater value. Opportunity cost is value sacrificed. Ideally, you would want to not have to sacrifice any value. And in any case, when going with your chosen option, you would want to minimize the value you’re sacrificing.

Yet this is not easy. Opportunity-cost thinking is not linear. You cannot always see the value of what you’re missing out on. A parent can do cartwheels much to the delight of their toddler--there’s immediate gratification for both parties here--but in choosing that as the default method of engagement with their child, he/she may miss the chance to be fully present and listen to their child meaningfully at other times. Opportunity-cost thinking is a vector: it considers both speed and direction and, if at all, tends to prioritize direction over speed. It is not necessary to create marginal value haphazardly (buy toys for the child, treat them for ice-cream) if it comes at the cost of creating outsized value in the long run (truly stimulating their development). 

What You See Is All There Is a cognitive bias that has us consider only the things that are immediately available to us. We’re drawn to the presence of something more than we recognize the absence of it. Which is another way of saying that as human beings it is natural for us to not ask about alternatives to the choice we’re making. This bias arguably is exacerbated by the incentives companies have in place for employees, for example. We tend to encourage problem solving over problem prevention, reward low-risk low-effort activities under the label of continued progress.  

The easiest way to identify opportunity costs you’re paying is considering all the things you do for free. You watch a movie, you hang with friends--you don’t have to pay for either of these activities except by way of the potential cost of what other productive thing you could have done with that time. This is a classic question that entrepreneurs face. Because they look at their time as being directly correlated to the value they could create in the world, they end up having to weigh opportunity costs all the time: should I go with family for a two-week holiday OR should I stay back and build out that roadmap for the next year? 

While I have no answer to that or similar questions (it is about priority), even approximating toward opportunity-cost thinking is positive. And that starts with weeding out ROI thinking from our own behaviors.

What strategies do you use for decision-making? Share your thoughts in the comments below.