Opportunity Cost
Hello members and subscribers! The twelfth Moonshots Master episode is here and we are diving into Critical Thinking and Opportunity Cost!
Getting us started on the journey is Brit Lewis from Mr Hancock, who talks about Trade-Offs and how an understanding of scarcity can help us grasp the number of possibilities around us. We then have a breakdown from Study.com which explains choice, Opportunity Cost definition and real-world examples demonstrating how every choice has a value.
Our recommended reading list and downloadable frameworks are available to help you go even deeper into the topic, so you can start adopting the practice of prototyping today:
Cost and Choice: An Inquiry in Economic Theory, James M. Buchanan
Opportunity Cost in Finance and Accounting, Robert Bloom and Hans Heymann
What key lesson are you taking from this Master Series show? Get in touch and let us know!
TRANSCRIPT
[00:00:00] Mike Parsons: Hello, and welcome to the moonshots master series. It's episode 12. I know, Mike Parsons, and as always, I'm joined by the man with the plan, Mr. Mark Pearson Freeland. Good morning,
[00:00:11] Mark Pearson Freeland: mark. Good morning, Mike and good morning members as we delve into a brand new topic within the master series. Mike, as a little bit of a teaser, today's really us taking the opportunity to talk about something pretty big.
[00:00:26] Isn't it? That's
[00:00:27] Mike Parsons: all right. We we weighed up the trade-offs. We did the profit analysis and we came to one great mental model that we should all be spending time studying, learning, and practicing. Mark, where are we going to. Today
[00:00:44] Mark Pearson Freeland: is all about opportunity costs this framework within the idea of critical thinking, I think has really come through in our recent productivity series, Mike, on the weekly show.
[00:00:55] But it's also something that I think most of us may be [00:01:00] aware of, but probably haven't spent too much time digging into really understanding what opportunity costs are and the perhaps subconscious decision-making a lot of us go through when we're weighing up what to spend our time on and our focus on.
[00:01:16] And I think today is a really a big opportunity for us to delve into opportunity costs and just understand how we might be able to take a little bit more ownership. I would say.
[00:01:26] Mike Parsons: I'd say, you could say build on that and say being more. I think it's almost a way of being a little bit wiser when you make a decision, don't you mark this opportunity costing it's about not only analyzing a particular option that we might have to take, but doing that in context of all the other options that we have.
[00:01:47] Mark Pearson Freeland: I think, yeah, absolutely. Right now, as we're all aware of is a time. I think we're maybe distracted or at least we've got more going on than perhaps ever before. [00:02:00] We've talked about it in the show previously, we've got our devices, pinging us all the time, whether it's emails and notifications, and that naturally takes your focus away from whatever it is that you're trying to do.
[00:02:15] And I think what is clear as we try and look at ourselves and judge what we spend our time on is that sometimes it feels like it's all out of our country. Doesn't it, other people requesting things, we get dragged into other areas. And that kind of feels a little bit overwhelming, I would say sometimes.
[00:02:35] And that's where we start to lose. As we'll find out today, the opportunity to spend our time on other areas that perhaps might be more important to
[00:02:43] Mike Parsons: us. Yeah. I, when I think about opportunity cost, the best way I can make the case for it is how many times we make the statement are. If I had no only knowing that at the time or with the benefit of [00:03:00] hindsight, I would have done something differently.
[00:03:02] I think opportunity costs is the chance to actually weigh up your options, your trade-offs, their implications prior to making those sorts of decisions. Don't you? I think it's a way of having You might even go as far as saying less regret of how you spend your time, because my D tell me this, do you not always find that much of your working time?
[00:03:27] If you were to look at the average day or week, the trade offs that you're making is okay, I've got a lot to do. It's a question of what am I not going to do this week?
[00:03:38] Mark Pearson Freeland: And that's an interesting break from the structure that perhaps we've all we naturally think we're going to do, because it's a matter of prioritization.
[00:03:47] I'll do this today, and then I'll come to that one tomorrow. But really as actually, like you just said, you're making an active choice to not spend your time on certain things. And that act in itself, I think is very [00:04:00] challenging. You're naturally inclined to not perhaps does, or at least I am. I'm not inclined to dismiss other things on my to-do list.
[00:04:10] I feel as though I should try and get to everything at some point, but once you start to take ownership of where you spend your time, what focus is you're giving yourself in these various, let's say tasks or areas of focus or distraction, perhaps then you can start to honestly, look at your to-do list.
[00:04:28] Maybe you've got checklist as a tool one day would say to maximize that time that you are proactively focusing on achieving those tasks.
[00:04:40] Mike Parsons: And if you are on a mission working on a big project, maybe your really doing your life's work, maybe you're just trying to be the best version of yourself.
[00:04:53] The worst thing you could do is allow all of the urgent things to take up your time and not make any time. [00:05:00] For the important things. So you also see a little bit of the Eisenhower metrics playing out here. What is urgent and important and allocating time to things that matter so that you can feel more fulfilled, more satisfied with the work you've done.
[00:05:16] Sometimes I get to the end of the week and I feel like events ran me. I didn't run the events. Do you ever have
[00:05:23] Mark Pearson Freeland: that? Oh, absolutely. Particularly in a time where you emailing and slacking and calendars, you just have to open up your calendar on the morning that you're going to start your work and you realize, oh, I haven't got any time this morning to catch up on the work I entered to do.
[00:05:42] And that's because your time is being almost dictated by others who are calling your attention. And it's something that, we actively learn with Cal Newport, Mike the idea of time blocking and focus so that you can get your deep work. Done once you start to [00:06:00] understand what part of the day you're most efficient
[00:06:02] Mike Parsons: at there, you have it marked.
[00:06:04] So we've made a very good case for opportunity costs. It seems like he can solve all sorts of challenges that we face in our working days, our working weeks. So mark, where do we want to open up this adventure? There's rip-roaring ride into the world of opportunity
[00:06:21] Mark Pearson Freeland: costs. That's right. I think I want to take the opportunity to introduce Britt Lewis from Mr.
[00:06:26] Hancock and YouTube channel. Who's going to help us get inspired around this idea of opportunity cost as well as understand a little bit around what the number of possibilities are that exist around us and therefore how hard it is to determine what to focus on. And that really starts with the essence of.
[00:06:46] Brit Lewis: Every day, everyone makes a variety of decisions choosing between two or 10 or even hundreds of different possibilities actions tend to be the best indicator of preference of what people actually want, but in doing so, people deny [00:07:00] themselves other options. This is the essence of scarcity. Everyone can't have everything all at once with every.
[00:07:07] Preference there exists a next best option. Something you would have done. If the first option wasn't available, this is called the opportunity costs because you do one thing. You've lost the opportunity to do something else. Opportunity costs can be thought of as regret pain people bear as they imagined what they could be enjoying.
[00:07:26] Even if they are enjoying what they're doing right now. More, another way to think about opportunity costs is money, value, profit you would have made. If you did something else such as a business venture opportunity costs can be understood by accepting these principles. People face trade-offs. The cost of something is what you give up to get it, to exemplify these principles.
[00:07:49] We will use the following example. It is a Friday night and you have the following options of things to do. And the order of how much you want to do them. See a movie with your partner, see a [00:08:00] movie with your friends or study by putting the partner. First, you have already faced the trade-off of friends versus more than friends.
[00:08:07] I was this trade-off made by weighing the cost. And the benefit, your benefit in this trade-off is that you may be entering into a romantic relationship rather than simply keeping the platonic ones you already have. But what about the costs? Each of the above options has the cost of time. You only have one Friday night until next week.
[00:08:26] So for now you only have time to do one thing. Both of the top two options have added the cost of spending money at the movies. However, the benefits of these options, namely being social and having fun with others, outweigh the costs. So you have placed them above the settlers, as stated before, for each of your top two options, your opportunity costs include time and money.
[00:08:48] How do we know this? Because the cost of something is what you. To get it another way to remember this is the same. There's no such thing as a free lunch, which means that there's some [00:09:00] built in costs for everything. So nothing is truly free of charge for each of the above options. You're spending your time and your money, which could have been used on a multitude of different things.
[00:09:11] If you choose option one, you miss out on the next best option. Meaning by choosing to go to the movies with your partner, you're giving up the opportunity to go to the movies with your friends. And it is therefore an opportunity cost. As with any choice you get the option you choose and vice versa.
[00:09:30] Mike Parsons: There, ain't no such thing as a free lunch mark. That is so true. And I think that really captures the spirit, if you will, of this idea of the opportunity costs, and then everything has a cost of time or money to it, and it will bring you a certain type of benefit. And often I think the biggest mistake I have found myself making is not so much [00:10:00] the cost and benefit analysis of a given option, but I would say I could do a lot more to understand the kind of weighing up process between all of the different options.
[00:10:13] How do you find yourself looking at opportunity costs? Do you have something similar mark where you you make each individual decision and you look at the costs and benefits. But you don't weigh them up or like, how does it work for you?
[00:10:26] Mark Pearson Freeland: I think for me, I am probably guilty of expanding the benefits of one versus the other.
[00:10:36] So what I might end up doing is assuming that the benefit of doing one type of activity will outweigh the benefit of the other because of maybe ego or because of a false sense of achievement. Yeah. Maybe it's a better idea if I go for that next beer as opposed to get an earlier night. [00:11:00] And I think that's really the challenge that I run into and what I'm curious as we dig into this big topic.
[00:11:08] Oh, hang
[00:11:08] Mike Parsons: on a sec. Sorry. I want to understand. So you over you, over-exaggerate the benefits is that.
[00:11:16] Mark Pearson Freeland: Yeah. And I think that's the lesson I'm looking to learn from opportunity. Understanding opportunity cost, because much like we heard in that previous clip, and as you've caught out, nothing is free. There's no such thing as a free lunch.
[00:11:30] So the benefit that we often attach to maybe an alternative. May not in fact be as beneficial as we perhaps want it to be. And that's only because we're not giving it enough time or discipline or critical thinking to judge it. And as we're finding out, you can only do one thing
[00:11:51] Mike Parsons: at a time currently.
[00:11:52] Do you think then that if you could. Way up and compare the benefits of your options. Better, [00:12:00] more thoroughly, that would help you be a less optimistic and more reasonable. Do you think if you were looking at the benefits of MOBE's or a good night's sleep, and then you could think about what, then I can wake up early in the morning.
[00:12:14] I could go to the beach. Do you think maybe it's the active comparison would weight your benefits better?
[00:12:21] Mark Pearson Freeland: I think so. I th I think it's the act of being able to look at two decisions, having different outputs. Yeah. It's the idea of looking at them saying, okay if this, if I do this, then I might experience a slower morning and I'll miss the opportunity to go for a swim or go for a run.
[00:12:43] And by being very functional and being. Quite critical, looking at things with a lens of efficiency and productivity, as well as a desire to, make the most of your time. Then I think that's going to [00:13:00] be slightly easier to go out and do, to try to compare those different options and therefore make a choice of what to essentially invest my time in.
[00:13:10] I think that's really what we're going to find out today.
[00:13:12] Mike Parsons: I think, our listeners right now have already done a cost and benefit analysis of being a member of moonshots. And I'm delighted that we can make this show, the moonshots master series for all of our members. And mark they saw the cost of one.
[00:13:33] Cup of coffee per month. And then the benefit of getting one of these shows and being part of our moonshots galaxy, unlocking the lunar powered comma, holy smoke. Are we on to, the opportunity cost of right here right now, both us and all of our members. Mark, I think it's only appropriate that we give a shout out to all of our members.
[00:13:55] Mark Pearson Freeland: Yes. And when you say all of our members, it's many members who just keep on [00:14:00] growing. It's clear Mike, that there's a group of people out there in the world. Listening and learning along with us. And it's great to have all of you present in all of our master series episodes. So without further ado, please welcome vulva Niles, John Terry Nial modularly can the DMR, Tom and Marjon Connor, Rodrigo Yasmeen.
[00:14:22] Lisa said. And Mr. Bonn, ju Maria Paul Berg, Kalman David, Joe, crystal Evo, Christian hurricane brain. Samuella Kelly, Barbara, Bob and Andrei, Matthew and Eric Abby and Josie, Joshua, Chris Coby, Damien, and our brand new members, Barbara Gavin and less a welcome all of our patron members. Thank you for joining.
[00:14:46] And being part of our experience Mike of really digging into each of these frameworks is ways of thinking every single month and finding out new ways to be productive
[00:14:58] Mike Parsons: versions of ourselves. [00:15:00] Yeah. So we want to think all of you were so grateful for your monthly contribution. It really is. It gives us a really good feeling, knowing that we put in so much work into this show and that you appreciate the value that we create.
[00:15:17] And yeah, definitely a big shout out to our brand new members, a Gavin and Debra. We really do appreciate your contribution. We welcome you to the moonshots family. You are now officially moonshot is you can shoot for the moon. You can be the best version of yourself as we learn out loud together here.
[00:15:39] And we are really in the midst of learning about opportunity cost. And we now have set the scene a little bit with this idea of scarcity. Now let's understand this a bit more and look at some of the real world examples.
[00:15:54] Study.com: The basic economic problem is the issue of scarcity [00:16:00] because resources are scarce, but once are unlimited, people must make choices.
[00:16:06] This lesson showcases the most important concept in macro economics, which is the concept of opportunity costs. Very simply. Everyone has the same amount of hours in a day, but we all make different decisions about what we do, what we choose to buy and how we spend our time. What determines these choices, opportunity cost does.
[00:16:29] Every time you make a choice, there's a certain value you place on that choice. You might not know it or think about it, but every choice has a value to you. And when you choose one thing over another, you're saying to yourself, I value this more than another choice I had. Now, the opportunity cost of a choice is what you gave up to get.
[00:16:55] If you have two choices, either an apple or an orange, and [00:17:00] you choose the apple, then your opportunity cost is the orange. You could have chosen, but didn't you gave up the opportunity to take the orange in order to choose the apple in this way, opportunity costs is the value of the opportunity. Lost value has two parts to it.
[00:17:19] It has benefits as well as costs. If you choose an apple over an orange, maybe the apple costs less, but maybe you enjoy it more. So looking at choice in terms of benefits and costs helps you make better economic decisions to make a good economic decision. We want to choose the option with the greatest benefit to us, but the lowest cost.
[00:17:46] For example, if we graduate from college and suddenly we find ourselves in the job, mark. There are choices to be made. And let's say that two jobs become available to us. We can [00:18:00] either work for company a or company B. Now the job was company a promises to pay us $20 an hour. While company B offers to pay us only $10 based on this information alone, of course, most people would choose company a why because they're paying a higher salary.
[00:18:23] But when you look at this kind of a choice in only dollar terms, then you're only seeing it from the perspective of the benefits. Now let's take that same example, but now we discovered that the job for company a requires a fancy dress suit that will cost you $1,500. You realize that the job with the higher salary may not be worth it.
[00:18:47] Now you're starting to think economically. You're thinking economically, when you look at the value of a choice through the eyes of the benefits and the costs, [00:19:00] whatever we choose, the opportunity cost is the value of the choice we could have had
[00:19:07] Mark Pearson Freeland: the value of the choice we could have had. Mike, I think that's a really nice, a little way of helping me understand some of that unconscious decision-making perhaps goes on in my own mind, this idea of a benefit being pretty clear, in that example of salary one versus the other, that's pretty obvious.
[00:19:29] And it's something that we all probably have experience of looking at and seeing the benefits, whereas when you don't consider that cost. And we were hearing in that clip, this cost of as the example was of the outfit, the work attire, you can't accurately balanced them. Can you've got to be able to look at both sides of the Seesaw in order to understand what's the real
[00:19:52] Mike Parsons: output.
[00:19:53] Yeah. And one of the things that comes to my mind is when you think about opportunity, cost [00:20:00] is people getting themselves into commitments. So making a decision for a certain path, let's take the classic sort of midlife decision buying a house and, folks go, oh yeah, I love this idea of owning my own home.
[00:20:19] And it would be so wonderful. And then when you go to buy the house, then you realize, oh, there's a tax on the transaction. And then you want a house and then when something breaks. You have to pay to fix it, not the landlord. And then you realize, oh, I have to ensure things, oh, I have to maintain a house.
[00:20:40] Oh gosh. Then I'm on the hook for this mortgage. And then I have to stay in my job. And I don't like my job. And all of a sudden opportunity cost. You got the benefit, but you far underestimated the cost of that benefit. [00:21:00]
[00:21:00] Mark Pearson Freeland: That's exactly. It is. Without being able to, and then sometimes as you touched upon earlier, it's the benefit of hindsight, isn't it?
[00:21:09] It's the benefit of, oh, if I'd done this instead, I'd be much richer from an emotional perspective or maybe financially, but I think where we're starting to what we're starting to understand from this idea of opportunity cost, it's like looking into the future and helping you make a better and more informed decision that you, then you're already putting yourself into the situation of saying here's the benefit that I got from this.
[00:21:35] And this was the. That I experienced that's right. And I can think of that without having to go through the entire process. Instead, I can make that decision now and therefore make a decision that I'm more comfortable
[00:21:48] Mike Parsons: with. Yeah. And I think there's a couple of different flavors of this opening up now, as I think about it, the, when you think about the opportunity costs, there's, the classic one, do you eat [00:22:00] a bunch of candy tonight or do you hold off sleep better and control your calorie intake.
[00:22:06] There's a cost benefit analysis happening there. It's the classic example of, if you really want to save money, instead of buying your Starbucks coffee every day, make your coffee at home and put that extra money into a savings account, invest it, that the program. So there's a really interesting thing here.
[00:22:27] I think things have hidden costs and you made the point earlier, like we get a bit excited about the benefits don't remember. Yeah.
[00:22:36] Mark Pearson Freeland: I'll absolutely. That's the only, only thing that we look at consciously. Isn't it. There you
[00:22:41] Mike Parsons: go. So you might look at the world and say, how much benefit does option a and B have, to the, what we heard in the clip, do you really understand the cost of each of those cars that dramatically could change your weighing up of them once you have not only the benefit, but the costs.
[00:22:58] The other thing is you spoke about the [00:23:00] future. I think sometimes we take that that gratification upfront and early, and we struggle to defer our gratification if we want to have the benefit now rather than being able to. Being a bit more stoic and saying, no, I'll go without now so I can have more later.
[00:23:23] And that's that difference between now and later or the present and the future? It's a really big part of opportunity cost, isn't it? Yeah,
[00:23:30] Mark Pearson Freeland: it definitely feels as though that's the thing that we're going to start learning and I believe it, again, comes down to a big old idea of ownership, taking ownership of your decisions and thinking, okay if I buy that extra a bag of sweets now, instant gratification.
[00:23:52] Do I really want the the stomach ache or the two fake, maybe I just want to save the money and [00:24:00] have it another time and making that informed decision. Isn't
[00:24:04] Mike Parsons: it? It is. And you talk about ownership, mark, and I think it's taking full accountability for where you are and your decisions and not blaming others.
[00:24:18] Something that's been huge in the moonshots podcast is this theme of like just saying it's on me, it's on nobody else. It's on me. And that's a big part of how to use the opportunity costs. Am I going to have the smoothie today or say for a restaurant on the weekend? Am I going to buy that, that little Consumable a goodie for myself now, or am I going to save for a holiday?
[00:24:44] These are all opportunity costs a moments where we think about now and later we think about the costs and the benefits. So I think what we're learning here is you have to look at the costs as well as the benefits and you need to compare now and [00:25:00] later, and this whole weighing up of things I think is really crucial.
[00:25:05] If at the end of the day, when you jump into the bed, do you feel satisfied and fulfilled with the things that you're doing, the decisions you're making, or do you have a little bit of a bit of a cloud, a little bit of a not things aren't quite right. I think opportunity cost is really about. Where you deploy your energy, how you make decisions and how you can wrap up at the day, feeling good about yourself.
[00:25:31] Cause you're like, you know what? I worked on a bunch of stuff that matters to me. I contributed, I created some value. I feel good about myself. And I think that's the big idea around opportunity cost. Yeah.
[00:25:44] Mark Pearson Freeland: I really think it is. It's feeling comfortable that the decision you've made is the right one for you.
[00:25:49] Everybody is going to look at benefits and costs perhaps slightly differently. Therefore take the ownership, do it yourself, either plan or write it [00:26:00] down and start to appreciate both sides of that Seesaw. So you know what you're missing as well as what you're going to benefit from.
[00:26:09] Mike Parsons: Yeah, absolutely. So before we launch ourselves into the decoding, the deconstruction of opportunity costs, I think we've got a chance to remind our members mark, that this is a master series, and we really do encourage you to go to moonshots.io and pick up on the show notes because there's a lot of goodies, especially from our series, isn't it that's right.
[00:26:35] Mark Pearson Freeland: For all our master series, you can go back to moonshots.io and dig into our show archives. And these show archives are pretty rich territories. I would say Mike, you've got breakdowns and. Hyperlinks to all of the clips that we use within the show. You've got transcripts, as well as reading lists, you've even got links into additional frameworks [00:27:00] that you can take a look at, and you can pause the show as Mike and I are chatting away.
[00:27:04] You can hit pause and say, hang on. I want to go a little bit deeper into that. Go along to moonshots.io, take a look at the frameworks that we provide up there and maybe fill them in, or maybe start applying them to your own decision-making and your own critical thinking processes. Because what we're all trying to do is learn out loud and be that best version of ourselves.
[00:27:24] So what we do with the moonshots team is try and put as much helpful content as we can over@moonshots.io for you to go and consume and enjoy.
[00:27:35] Mike Parsons: Yeah, just for this show alone on moonshots.io, you'll find. A huge reading list of things related to the opportunity costs. You'll get links to all the clips, to the frameworks.
[00:27:49] It really is all about being a whole master class in just 60 minutes of your time that you can actually really actually grow your [00:28:00] capacity to make better decisions, think better and get more out of life. And I tell you what helps you get more out of life map and that's understanding some of the deeper dimensions of the opportunity.
[00:28:13] Mark Pearson Freeland: That's right. We're next. Now we're jumping into an area where you and I can dive that little bit deeper into opportunity cost. Mike, let's hear from econ clips. Now break down the idea of psychic profits. Every human
[00:28:26] EconClips: decision incurs costs. This is due to the fact that people can not act in two divergent ways at the same time.
[00:28:32] So they must choose between actions. In the end. They only have one body with two hands and cannot be in two places at the same time. Moreover, the resources people use are limited or scarce. People must constantly decide whether the value of the chosen option exceeds the value of the rejected option.
[00:28:50] The cost in the above examples, each of the described people gain money in accounting terms. However, in economic terms, each of them suffered [00:29:00] a financial loss. If the only motivation for people were money, we would say that each one of them lost such an assumption would be wrong. However, because people are not driven solely by money.
[00:29:11] We call the other non-monetary subjective gains from action. The psychic profit. This is explained very clearly by professor MOHAI and the free entrepreneurship textbook. All people that act seek profit. It is not merely about making money or strictly speaking, assuring that their monetary income outweighs their monetary costs.
[00:29:31] What counts is another gain? The psychic profit people can be driven by vastly different ends and seeking material wealth is, but one of them, they may also seek personal happiness, aesthetic sensation or fulfillment and religious beliefs. All in all such are the ends. People usually strive for in their actions.
[00:29:48] This is why the monetary or purely material gain is often just a means to another end, such as the use of one's free time to one satisfaction understood subjectively and individually. [00:30:00] Let us go back to the examples. Once again, the student is aware that his field of studies will not help him find a well-paid job and that he could have looked for a job without the DOI, but for him, his great passion for the field, the outweighs this, although he will not use the knowledge he gained during his studies to gain money, he will make an extensive use of it during his free time.
[00:30:20] And this will enrich his life experience in many pleasant moments. The freelancer loves physical work at home. He rebels in the deep satisfaction that doing something by himself gives him. He also likes the thought that he will be able to tell his friends that will visit him, that he carried out the whole renovation on his own.
[00:30:39] He expects their praise to positively affect his well-being. The baker very much dislikes his previous job. He became frustrated with his bosses who were ignoring many of his ideas for new products. He also disliked taking orders by establishing his own bakery. He gained the independency crave for it is worth noting that if the baker succeeds in [00:31:00] developing his business, he can make a monetary profit as well.
[00:31:03] Given a year or two, he may start to earn, say twice as much as he did in his previous full-time job. The man who has invested in fireworks, dislikes and distrust banks, he got into his head that should he deposit his money in a savings account? He would never get it. If he chooses to deposit the money, he would worry all the time about it.
[00:31:23] So to spare himself, the stress he chose instead to invest in fireworks and have his peace of mind. Our characters may subjectively judge, the combined monetary and psychic profit to be greater than the opportunity. Cost people vastly differ. They enjoy very different things and can value the things they forgo differently.
[00:31:42] Only one who makes the choice knows whether one has gained or lost in the process. There is no way to judge this subjectively or outside of the mind of the person making the decision, certain things. However we know from. We know that at the moment of putting the choice into action, the human being [00:32:00] subjectively values, the chosen option more than the opportunity cost after the fact, it may turn out that the reality differed from one's expectations in such a situation, one may regret the action as a subjective loss.
[00:32:12] We also know for sure that every action has a cost when a man chooses to visit a particular restaurant and foregoes being in another one at the time, when a company invests in a financial instrument, it foregoes buying new equipment for its factory. For when the government builds a road, the capital pushed away from the private sector cannot be productively used somewhere else.
[00:32:34] According to the timeless advice of thread, the leak , it is thus beneficial to look not only at which has seen, but also, which is not seen.
[00:32:44] Mike Parsons: Psychic profit might I would, this sounds like something that someone dreams up when they've had a few too many of those beers when they were weighing up whether to have one more, one more beer or go home.
[00:32:57] The funny thing is it's [00:33:00] really making an interesting point that I think we see all around us. We don't just perceive the benefit in something as being financial, but actually there's a whole lot of other things like you buy a house, you actually got a home for your family. So what value can you put to that?
[00:33:19] I think about in fact, some of the investments people make in community activities working at nonprofits, volunteering, they are all part of this more socially driven. Sense of benefit and a value that is beyond money. And I think the point here is that as we get into, costs and benefits, which are really part of the opportunity cost formula, what we need to do is to look at well, what are we truly gaining beyond the money?
[00:33:49] Or what are we giving up beyond the money? Don't you?
[00:33:52] Mark Pearson Freeland: Yeah, I think there's a real aspect to opportunity costs as well as this concept of cyber profit, [00:34:00] which is around wellbeing. It's around comfort. It's around what we're perhaps proud of saying we do or where we're spending our time and this idea of getting profit psychologically, which is not attached to finances or anything like that, or betterment or ego, perhaps.
[00:34:21] It's just something that we're comfortable and. Within ourselves. And I think that's, again, speaking back to some of the clips that we had earlier in today's show, which is around again, taking time to deliberate and consider the benefits as well as the cost of each of your decisions, to make sure that you're making the one that you feel most let's say proud of and you're most comfortable with and your most happy spending your time doing.
[00:34:51] And this is quite that key element. Isn't it like, although psychic it's like a profit, like you say, it's something invisible and it is really, but at the same [00:35:00] time, it's something that we can't judge for one another, it's gotta be that subjective opinion. It's gotta be something that matters only to you only to me.
[00:35:10] And therefore only your, I can make our own
[00:35:14] Mike Parsons: decisions. Absolutely. And I think a great example of psychic profit is if you're weighing up to job opportunities. Okay. I think one of the things we're really conscious of is what aside the compensation, the financial package is. Are they nice people? Do I want to work with these people?
[00:35:36] Do I think we'll be a good team where we have some fun where we laugh. We do good work. This I think is one of the biggest opportunities when we weigh up the benefit of something, it's not just the paycheck. It's the people too. And what, you will find endless studies of employees that when it really comes down to.
[00:35:59] [00:36:00] The salary is not the biggest driver of preference in the job. It's about being acknowledged. It's about personal growth and enjoying working together with the people around you. That is a true job satisfaction measure, not the income, rarely if ever is his income, the number one in job satisfaction, right?
[00:36:24] Mark Pearson Freeland: Isn't that interesting. And it speaks back to the power of regret that we've obviously worked on on the moonshot show previously as well. Mike, where the people who when you look back again, it's this idea of hindsight. When you look back from maybe not your deathbed, a time later down in your life, and you think back to all your decisions, the things that people regret is not necessarily going after more money it's things that they didn't physically do because they didn't prioritize it.
[00:36:53] And I feel as though Daniel pink would agree with where we're leaning towards with regards to the the idea of opportunity [00:37:00] costs and cycle profit, because his was all around helping guide the decision-making by looking forwards. And I think that's really where the psychic profit comes in. Don't you?
[00:37:11] Mike Parsons: Yeah. And I think now that we're starting to build this idea of what are the true costs and benefits? I think we can jump into our. Our next clip. And this one is really interesting because he really starts to dig into not only some of the costs that we might see obviously, but those that might be more hidden consumers typically
[00:37:35] Course Hero: think of costs as the amount paid when buying something, however, economist to find costs as the value of resources given up in order to produce a good or service.
[00:37:45] For instance, the time it takes to do something represents a cost. There's also opportunity costs the cost of giving up the next best alternative. If two opportunities are mutually exclusive, meaning a person can only choose one of these [00:38:00] opportunities. One opportunity can not be pursued giving up this opportunity as part of the cost of something.
[00:38:06] A cost involving monetary payment is known as an explicit cost. These costs have a definite readily identifiable value. Employee wages, utility and equipment are all examples of explicit costs. Even bartered goods and services are considered explicit costs because they have a specific monetary worth. An easy way to remember explicit costs is that there's probably a receipt for that.
[00:38:31] And implicit costs is the opportunity cost that occurs from the allocation of resources for a specific purpose, and often can not easily be assigned a direct monetary value. For instance, the time required to train a new employee is an implicit cost maintenance activities such as taking a robot offline for routine service are also implicit costs, many opportunity costs or implicit costs, the cost of giving up the next best alternative.
[00:38:57] For example, a company that makes household [00:39:00] appliances might make a choice about how to spend available money. The company might choose not to invest the money in producing refrigerators, but instead spend the money on investing in employee training. When the company gives up the opportunity to make money by producing and selling refrigerator.
[00:39:17] This is part of the cost of investing in employee training. Similarly, if a person decides to start a business, she might make a decision about her income. If she gives up the chance to earn a salary at another firm, choosing instead to work for her own company, the salary she gives up is a cost. Many costs have both explicit and implicit portions.
[00:39:39] For example, if a machine in a factory breaks down and needs repair, the actual cost of the repair is an explicit cost, but the revenue loss during the machine's downtime is an implicit cost. It is the cost associated with loss production time by not using the machine. During the repair time, the company gives up some of its ability to produce total [00:40:00] economic costs is the sum of explicit and implicit costs.
[00:40:04] Say a person decides to leave their job for an hour to wait in line, to get a new phone. The new phone costs $200 and their job pays $30 per. In this case, the explicit cost of the phone is $200, but the phone also has an implicit cost of $30 because they gave up $30 by not working for that hour. They waited in line.
[00:40:25] The total economic cost of the phone is it's explicit costs of $200. Plus it's implicit cost of $30 or $230 businesses must account for both types of costs.
[00:40:39] Mark Pearson Freeland: I think Mike, what we're really understanding at this point is the balance that has to take place when you're looking at all these different type of costs.
[00:40:50] And I think what's really interesting about that particular key there is it's helping me appreciate and understand the fact that not only are there going to be [00:41:00] costs, physical costs, explicit costs that are attached to certain decisions I might make, but the psychic profit, the opportunity cost the implicit costs.
[00:41:12] There are something that only I can put a value against and I need to be able to balance these hidden costs, whether they're explicit or implicit. And again, A decision, an active decision on what it is that I'm going to spend my time on, because if I don't, then I'm going to, again, either lose, focus or spend my time on something that's far less productive.
[00:41:39] Mike Parsons: Yeah. And the example, I think that is really helpful here is they we're talking about people being hired and trained for jobs. And how that relates to retaining staff. So let me try and paint a picture of opportunity costs, where we often miss some of the more implied things or the [00:42:00] opportunity costs.
[00:42:00] For example, let's say you and I, mark are running company X, Y, Z, and we are ruthless at X, Y, Z. We don't want to give out our staff sent in salary more than we have to. So we always pay them very little. We don't give very many benefits, but you know what the big catch with this thinking is mark is we seem to lose staff all the time and we have to go and re hire new people.
[00:42:27] And we keep churning through people. In fact, when we look at it, we're like, wow, people don't work at our company for various. Now explicitly we've kept the salaries very low and we are being, as the saying goes penny wise, pound foolish because actually the cost of hiring and retraining people the cost of losing all of the knowledge of an employee is so significant that if you look at the opportunity costs, that really happens here, it would make far more [00:43:00] sense to pay our employees more generously and more, fairly, because we would turn over staff less people would be more happier and satisfied in their work.
[00:43:09] They would learn more, they would share more. But we're being very, we're not really looking at the opportunity cost. I dunno what the inverse of not looking at opportunity cost. It looks like, but like we often we miss some of those implied or opportunity costs moments. Because as what was said in that clip, they, if it doesn't have a, like a receipt and an invoice matched up to it, we sometimes vastly underestimate the true cost of things.
[00:43:38] Don't we?
[00:43:39] Mark Pearson Freeland: Yeah. They can be totally invisible to us. They can be totally unaccountable and things that, again, going back to Daniel pink and the power of regret, we might not even consider that's right. Days, weeks, or even years later than the event, we might look back and say, you know what, buying that house with that [00:44:00] mortgage and the insurance and all the fixes we had to do, man, that was a bad idea.
[00:44:04] Or maybe it was a good experience. And one that we can look back and positively, but financially it was a challenge. And again, I think this opportunity cost area really comes down to this idea of really considering every output. And I like the build that you were talking about earlier. Which I think relates to that second order thinking piece, what is the output of me making decision a versus what's the output of considering decision B?
[00:44:36] And I think that's a really interesting little build that obviously we've dug into on the master series previously as well for all of our members. But when we look at opportunity costs, it does require that a little bit of balance and looking at both outputs. Doesn't
[00:44:50] Mike Parsons: it? Yeah. So check this out. There was a study done in Australia that talking about employee retention and said that to [00:45:00] replace an employee on average, the study found it was 33% of that employee's salary.
[00:45:10] So let's say someone's earning a hundred K. To replace them. The actual opportunity cost got measured. It's $33,000. And just think about it. If you are, have, you've got a great employee who's doing well and you don't want to give them say a 10% increase in salary, think about it this way. Are you willing to pay 33% to replace them to go out?
[00:45:39] You lose them. You think of all the downtime and productivity, the cost of putting out the ads, interviewing recruiting, signing paperwork, administrating, onboarding them. That is the true opportunity cost. Do we give this person a raise or if they quit, are we willing to replace them and to [00:46:00] take that cost benefit analysis and all of a sudden, then you're like, actually right.
[00:46:07] We're going to become a lot more compassionate as company owners
[00:46:10] Mark Pearson Freeland: here. Yeah. A lot more compassionate because fundamentally, you know what that bottom line is going to look like. Exactly.
[00:46:17] Mike Parsons: And just think about it in a really practical sense when someone good takes another job and they were really doing a good job and were quite a clutch player in the team, think about the drama of, are they gone?
[00:46:32] Who's going to do that. Now. Think about all those moments in a come every single day, they're gone. Nobody else can do it. What are we going to do?
[00:46:39] Mark Pearson Freeland: It's a fascinating build isn't it? Because immediately you probably are only aware of those costs that are explicit, the things that, you know, like salary.
[00:46:51] Okay. No problem. He's going to leave. We'll save a hundred grand. Yeah. But it's the, that additional piece that sometimes it's only like we know visible [00:47:00] following that event. That then starts to add up doesn't it. And not only that additional 33% sorry. Yes. So 33% 33 grand from the thing it's the time, it's the emotional stress.
[00:47:15] So on what are these things? These are all implicit costs on the, yeah.
[00:47:20] Mike Parsons: And which all become much more obvious with the benefit of hindsight.
[00:47:24] Mark Pearson Freeland: They do and they can't be tracked. I think that's the key
[00:47:27] Mike Parsons: thing is, yeah. So if you want to track what we're doing here on the moonshots master series here on episode 12 on the opportunity cost head over to moon shots.io, you'll get the show notes for this show and for all the other masters series for all the podcasts.
[00:47:45] And look you'll even get t-shirt designs where you might. We should talk about that for a moment because it's those that are listening right now have made it possible that we can actually launch. The somewhat official moonshot [00:48:00] merchandise. Is this not correct? It's so
[00:48:02] Mark Pearson Freeland: correct, Mike and already, we're starting to see all of our members getting in touch and voting Mike for their favorite designs.
[00:48:12] Like you say, these are pretty hot off the press. They are brand new merch ideas. Like you say, it's somewhat official when we hit the 50 number. And actually, Mike, we're pretty close to that. So we better start warming up the printing press. Now that's right hearing from you, our members as to which designs you'd like to see rolling off the production line first.
[00:48:35] And it's amazing Mike, to see how many people, including crystal Christian, as well as Barbara, getting in touch on patreon.com, leaving us their insights and preferences, but we've also seen. Inputs on LinkedIn, Twitter, Instagram. It's clearly these t-shirts Mica going to sell like hotcakes
[00:48:55] Mike Parsons: who would have thought.
[00:48:56] And it's fantastic just to hear from [00:49:00] you. So we love it. When you share with us what you like what you would like, whether it's merchandise or experts for us to study on the moonshots podcast or topics for the moonshots master series. So head over to moonshots.io, where you will get a whole lot of lunar powered, good karma as you vote for your favorite merch.
[00:49:21] T-shirts hoodies posters. It's all there for the taking. We just need to hear from you. So mark we're on the tail end, the last leg of the show. Where we study opportunity cost. And Mike, I think a cup of coffee is an analogy that we're using all the time. When we talk about the opportunity costs to participate in the men's shelter, podcasts only that's
[00:49:46] Mark Pearson Freeland: right.
[00:49:46] If we want to hear from you, our listeners and our members about different ideas, we also want to hear from a couple more clips with regards to opportunity costs. So Mike, as we enter our third part of the show, let's hear from [00:50:00] two to two, you break down very physical, practical, relatable examples of what the opportunity cost of a cup of coffee are.
[00:50:09] Tutor2u: Opportunity cost measures the cost of the choices that we inevitably have to make because of scarcity in terms of the next best alternatives that we may have to sacrifice, essentially cost describes those. Trade-offs those key oftentimes dilemmas that we have to make in a world of. Satisfying one objective more means that you may achieve another objective less resources available to produce other goods and services.
[00:50:37] I'm going to take you through to apply to examples to help reinforce the concept. The first is your choice of coffee. Let's say, for example, you're choosing between having to Starbucks for an expressor with an extra shot or two, and taking a cup of instant coffee at home to a Nescafe jar and the capital.
[00:50:54] Let's assume that Starbucks price is three pounds per cup. And my working assumption is that as a cup or a cup of [00:51:00] Nescafe cafe instance costs, you let's say 15 P per cup from the jar. In this case, the opportunity costs of spending three pounds on a Starbucks. Espresso is not the three pounds you've given up, but it's the giving up 20 cups of instant coffee.
[00:51:17] And that sends Starbucks. That's actually pretty expensive. However, of course the key thing is how we frame a choice does influence our decisions, does influence the choices and behaviors that we make. Let me throw in a third choice here, for example. So let's assume that a nest cafes, 50 and paper cup Starbucks is three pounds a cup, but that the cup of Nespresso coffee from the machine is let's say 50 paper per pod is now the opportunity cost of buying a Starbucks express.
[00:51:50] Now I be measured, be reframed by another alternative, namely giving up sex cups of next best airports. How you [00:52:00] frame the opportunity cost does influence the choice. Many people actually regard an espresso is expensive. Those pods, 50 pay per pod. That looks like a pretty expensive way of making a cup of coffee at home.
[00:52:12] But actually, if the frame of reference for you is Nescafe instant. It is the expensive. However, if the frame of reference has started. Those Nespresso cards actually look pretty decent value. In fact, you might argue that practically giving them away 50 pay per pod. Let's move to my second example, which is the NHS cost of treatment.
[00:52:34] Now the national health service in the UK actually has a toolbox of over 2,300 surgeries that they perform across their hospital network with different hospitals, specializing in different procedures. I've taken a selection here of the costs of a range of procedures from that 2003 of them to total.
[00:52:57] And you can see that some procedures are extremely [00:53:00] expensive. The heart's a compact heart surgery more than 22,000 pounds burn surgery on children under the age of 18 costs over 40,000 pounds to provide bilateral cochlear implants. Also they're expensive. Other procedures cost less, and therefore we can think about the opportunity.
[00:53:19] In terms of these treatments, for example if we take a limited budget in the NHS, if you allocate more resources to one treatment that may mean that there is less available to provide other NHS treatments, people may have to go for example, onto a waiting list. Here's a good example. The opportunity costs of one extra hip replacement is not 5,400 pounds.
[00:53:45] I thought we could express it as the funds providing cataract surgery for six people. That's how we would express the opportunity costs in this case total in terms of pounds and Pence. But in terms of the opportunity, [00:54:00] given up to provide alternative services,
[00:54:03] Mike Parsons: Now that was pretty good mop because what he did there was actually, when he was comparing those two different healthcare outcomes, he was saying, you can have another hip for one person, or you could fix something for six other people.
[00:54:22] And as he said that I instantly had, oh we've got to go for the thing with the six people.
[00:54:27] Mark Pearson Freeland: Yeah it's a funny concept. Isn't it? The big ticket item that affects, like you say, one person versus smaller things that benefit more. It said it's a tough one, isn't it? It's very difficult to make that type of judgment.
[00:54:44] Mike Parsons: Yeah. I, and I want to go back to his coffee one and I really want to relate to it a little bit. So listeners members, you might be thinking, is this a coffee podcast right now? But bear with me. So I'm going to take you through my thinking on [00:55:00] coffee. I love coffee just by the way. And here's how I've broken it down to look at the opportunity costs the benefits and the choices that I make.
[00:55:10] I choose to have an approach like this. I only buy coffee once or twice a week at my local cafe. Instead for the vast majority of time, I have a coffee machine where I put coffee beans into the machine and it makes coffee for me. And I do that twice a day. That's usually my thing. Yeah. Here's how I think about it.
[00:55:36] I could do it cheaper and have instant coffee at home every single time and never have coffee out. I like and respect my coffee way too much. And I really enjoy a proper espresso coffee. That brings me joy. Now here's the interesting thing I could walk to the cafe it's really quite close and [00:56:00] have coffee from the cafe.
[00:56:03] Twice a day. It really wouldn't be that much of a stress. I could walk there, grab a coffee. It'd be nice to have a break come home. Now what's interesting about that is that to those two visits every day to the coffee to the cafe to get my coffee would cost me about $8 50. Now, what I choose for instead is spending $10 on hour, probably a little bit more.
[00:56:29] Now it's probably about $14 for a bag of coffee that would produce numerous cups of coffee. I don't even know exactly, but I'm going to guess at least 30 or 40 cups of coffee, you can get from a bag. Probably let's say 30 now. So here's the interesting thing. When I weigh it all up, I like my coffee. I like my coffee a fair bit, but here's the interesting thing.
[00:56:54] I don't get the top of the range coffee beans. They're about $40 a bag. I get the [00:57:00] $15 ones and I'm pretty happy with that. Trade-off I visit the cafe, twice a week to get coffee. And that's how I weigh up the joy because the coffee at the cafe is amazing every single time, but I'm not prepared to spend $8 a day.
[00:57:16] Which if you think about it, mark, that really starts to add up. You're getting in there to $70 a week versus the cost of just buying the beans from the supermarket. This is my navigation of weighing up cost and benefit. I get a really nice coffee experience at home. I get the great one at the cafe.
[00:57:39] How do you do your coffee? Trade-offs and how do you look at the costs and benefits for your coffee? Because I think whilst it might sound crazy, you can do this same exercise with anything you invest in. It could be with stocks, it could be with cryptocurrency. It could be how you spend your time. It doesn't matter.
[00:57:58] I think it's the capacity [00:58:00] to have that. What we were hearing from tutor to you is the frame of reference. I could do it cheaper, but when I look at the joy, it brings me I've taken a fairly reasonable and affordable approach, knowing that I couldn't have better coffee more consistently, or I could have cheaper coffee more consistently.
[00:58:19] I'm happy with the opportunity cost and the trade offs from my coffee. How do.
[00:58:25] Mark Pearson Freeland: I think Mike, what you're talking about here is a bit of psychic profit as well. You've got the benefit of going a couple of times a week, cause it makes you feel good. It's getting out and about it's supporting your local business as well.
[00:58:38] For me, I very much have the balance of looking at finance or financials. So I'll be thinking about that cost of the coffee versus the cost of having a coffee at home, similar to you. It's a bag of beans. I can make it maybe two or three times a day, but what I do. Is the interaction. It's the social [00:59:00] element.
[00:59:00] It's the walk round to the coffee shop, taking the dog fresh air, seeing the neighbors. And the times that I'll go will be times when I want to go out and socialize, perhaps after a group activity, maybe it's after a run or a swim, I'll invest in the cost of a cup of coffee because it's allowing my profit or my opportunity cost is I'm investing in the time in order to see other people interact, maybe brainstorm, or maybe just kick back and relax by being with other people.
[00:59:36] The taste of coffee of course is a substantial driver to for me, my. Balance that I'm doing is more on the social element more than the
[00:59:46] Mike Parsons: taste actually. Yeah. So what you're saying is you're a nice social guy and I'm just a coffee snob. I get it. I get it. I get it. That's it. We can do this exercise with any sort [01:00:00] of decision that we make.
[01:00:01] And in fact we heard earlier, we make so many decisions every single day. If we're able to way things are better to look at the cost, the true cost, because we've discovered that there are some hidden costs and we look at the different sorts of benefits. So mark, whether you're weighing up your coffee decisions and what matters to you w when you weigh up social versus taste and all of those good things, you can do the same exercise, really with anything in life.
[01:00:30] And what I think. There's opportunity cost model is showing us this habit, this practice of looking at both the cost and the benefit, it's all about working out what really matters. And I think as individuals, the greatest resource that we have is our time and our attention. And so we can actually use opportunity cost as a way of thinking as a mental model, as a habit, and as a [01:01:00] practice, not only mark to work out the true costs of, and benefit of coffee, but also we can apply it to something bigger.
[01:01:10] And it's this idea that time really is money. There's an
[01:01:14] Mark Pearson Freeland: old
[01:01:14] Mike Clayton: saying time is money. What it means is that if you try to save money by doing something. Then you may be wasting money because it will take you time to do the thing yourself that you could have spent doing other things you need to think about the value of your time.
[01:01:38] And this is particularly salient to many internal organizational projects that do not account for the cost of their people's time, but I'm using the time is money example to illustrate opportunity
[01:01:55] Mark Pearson Freeland: cost.
[01:01:56] Mike Clayton: When you use your time to work on one [01:02:00] thing, you lose the opportunity to spend that time working on something else equally.
[01:02:08] When you spend money on one thing, you lose the opportunity to spend the same money on something else. And if that something else is worth more to you. And that is the opportunity. Cost opportunity costs represent the benefits that an organization or an individual for go when they choose to spend their time or their money on one thing rather than own another of course, the core application for the idea of opportunity costs to project managers is in our business cases, our investment appraisals and our project proposals and opportunity costs are not limited to [01:03:00] financial monetary costs.
[01:03:03] Any costs that you forego isn't opportunity cost, whether it's the cost in money terms in resource terms, in usage of assets or in deployment of people and their time. In fact, wherever there is a difference between the benefit in any shape or form between two options, you create an opportunity cost that benefit could be personal pleasure or competitive advantage or company morale, but we use the term explicit opportunity cost to refer to the use of money for one purpose when it could be used for an alternate purpose.
[01:03:47] And we use the term implicit opportunity cost when we're referring to the use of anything other than money, time, resources, energy effort. [01:04:00] So in the evaluation of investment appraisals business cases and project proposals, Project decision makers, members of the project board, your client, your project sponsor needs to use the idea of opportunity cost to properly evaluate the proposal or business case in
[01:04:21] Mark Pearson Freeland: front of them.
[01:04:23] Mike Clayton: Understanding the potential missed opportunities that they will forgo by following through on one particular project proposal will allow them to make a better informed decision and better informed decisions lead to better projects. And the opportunity cost calculation is very straightforward. The opportunity cost is simply the return on the option that you have forgone minus the return on the option that you have chosen.
[01:04:59] And [01:05:00] it doesn't matter how you calculate that return as long as you do it on the same basis for both options, therefore stands the option that has the greatest negative opportunity
[01:05:13] Mark Pearson Freeland: cost.
[01:05:15] Mike Clayton: The opportunity benefit is the option that you should prefer on the basis of this calculation. Other factors may of course apply the concept of opportunity.
[01:05:28] Cost helps us to properly evaluate our choices between several alternative options. And of course, one option is always to do nothing.
[01:05:42] Mark Pearson Freeland: One option is always to do nothing. The good news is I'm pretty sure you and I, the team and our members that don't choose
[01:05:50] Mike Parsons: that option doing nothing, but it's really interesting.
[01:05:54] Like we do fall in the trap of saying, I'll do it myself. And then you're like, oh my gosh, what have I got myself [01:06:00] into? This is taking forever. That's when you didn't calculate the opportunity cost.
[01:06:04] Mark Pearson Freeland: All right. Yeah. I think I said that clip from Mike Clayton from the online PM courses online, I think really brings us home with regards to the idea of opportunity costs helping us calculate the benefits for versus the costs.
[01:06:19] But the thing that's really standing out for me, Mike, is the concept that your time is valuable. Sometimes you might underestimate the value of your time or the time of your team. And I think the call-out here is really to consider if you are going to let's say delegate work, or maybe take on work yourself rather than delegate it, or rather than maybe pitch it out or whatever the concept might be.
[01:06:46] Maybe it's just DIY. Maybe you're going to fix something around the house. You think that you might be saving some money when actually you're spending a lot more time because you don't know how to do it yourself. Maybe you're going to go back and do a job [01:07:00] that needs to be redone. Regardless of that, it's just the idea of spending your time on something that maybe you're not very efficient at doing, and somebody else could do it for either a quicker or B.
[01:07:11] You could be spending your time doing something that's even more valuable.
[01:07:15] Mike Parsons: And it's really the cost and benefit analysis, which is at the heart of the opportunity cost. And that's been, that's like the core formula, isn't it? That's the habit to adopt.
[01:07:27] Mark Pearson Freeland: That's the habit to adopt. And again, if we are looking at opportunity costs and the idea of utilizing this in our day-to-day lives, this habit formation of looking at your time as a tangible thing, something that is as tangible as a colleague, on the bottom line or something physical within the business, I think is a real shift in mindset.
[01:07:55] Isn't it? It's something that I, for one, certainly when I was [01:08:00] a lot younger would not appreciate I'd think, oh, I'll just do it. And it's not going to be that efficient. If there's somebody else who is at either a, maybe a little bit better or quicker or more experienced, or maybe I just need to go and work on something else, that time is something you can't get back.
[01:08:19] And. What this opportunity costs, shows really taught me is being able to look at both sides of the coin and understand yeah your money, your time is money. So don't waste it.
[01:08:32] Mike Parsons: Yeah. And the the bigger build here, it's there's a great quote from Stephen Covey, who we absolutely love on moonshots.
[01:08:40] And he says, I'm not a product of my circumstances. I'm a product of my decisions. Your
[01:08:45] Mark Pearson Freeland: decision of where to spend your time, maybe. Yeah.
[01:08:48] Mike Parsons: And you've talked a lot about ownership, mark. That is the highest form of ownership saying I'm not going to blame the weather that I didn't run. I'm going to own the fact that I just didn't have it in [01:09:00] me.
[01:09:00] That's someone taking the ownership and then you can then say where I am today as a result of my decisions and I'm going to own those. But I think really what we're talking about here is when we are making a decision, we're allocating our resource. In fact, we're allocating our most precious resource, our time and our attention.
[01:09:21] And if you can use opportunity cost to look at the true cost, both the kind of implicit and explicit and the benefits you can start to scenario wise, you can play it out and say if I did that habit, how do I think that would work versus the other option? And I think this helps us be more informed, more thoughtful, more intentional about where we put our energy and the sort of outcomes and results we get.
[01:09:48] That's
[01:09:48] Mark Pearson Freeland: right. It's taking that care and the thoughtful approach to considering those decisions and maybe what comes out of those decisions in order to make the best for informed [01:10:00] choice. And I think this is really what's stood out, isn't it taking the time to do it properly rather than risking looking back at an activity or a decision with maybe regret or the hind, the old hindsight, if only I had gone and done this instead.
[01:10:18] Mike Parsons: Yeah. The benefit of hindsight. So Mike, we have gone through quite a journey. We've got some real inspiration around, trading off and there's no such thing as a free lunch. And then we decoded the hidden costs we looked at, how to think about the context of a cup of coffee.
[01:10:39] Where have you taken the greatest aha moment? What are you putting down on the notepad is something that you want to spend more time on?
[01:10:47] Mark Pearson Freeland: To be honest I've taken a lot of notes as we've gone through. Some, I know pat is looking pretty full already Mike but I think it's actually going back to the second clip we heard in the show, [01:11:00] which helped us determine the connection between scarcity and choice and this idea that every choice has a value for me, this is really speaking to the highest order of the opportunity cost framework, which is if I choose this, then the benefit or the cost or the opportunity I'm getting is X value.
[01:11:21] Versus if I go and do something else, it's Y value. And for me, understanding that every choice has a value. And therefore trying to be a little bit more conscious about whether that value is positive or negative. And how is it positive physically, then I'm going to start to appreciate it a little bit more and be more proactive from habits, your perspective.
[01:11:43] But what about you, Mike? W which areas, which clips, which concepts have really stood out to you with regards to opportunity cost?
[01:11:52] Mike Parsons: Yeah, I, so I definitely, I liked the idea of the, the fact that explicit costs have a [01:12:00] receipt and implicit costs tend to be a bit softer and more ambiguous. I also looking at my list of notes here, I love the truism of every choice has a value to it or that, or said differently.
[01:12:14] There's no such thing as a free lunch. And to me, I think that the most important thing I can do is to do a more structured comparison, write the list and compare a versus option B. If that was one thing that I could do out of this, I think I could do that more structurally like more rigorously, I think maybe sometimes, because I'm a bit too rushed.
[01:12:42] I maybe do it generally. And I'm okay if I've been burnt once by something and said, oh geez, that was a time suck. I'll avoid that. But I wonder if I can do that thinking before, so I don't have to learn the lesson.
[01:12:59] Mark Pearson Freeland: Yes, [01:13:00] exactly. Exactly. And it is, it's that preparation, isn't it?
[01:13:03] It's the journaling at the start of your day, it's the journaling and reflecting at the end of your day and through the process of observation, I think you can tell those costs and that balance of time, much more readily. And again, it's like anything like the more you do something, the easier it becomes.
[01:13:21] So just begin it today, perhaps
[01:13:24] Mike Parsons: in deed in day, indeed, that is wise wiser as begin to die. I think the author of atomic habits, James clear, he would be so proud to hear us starting today. Listen, thank you to you and thank you to you, our members, our patrons this has been another master series in fact, episode 12, and it's all been about the opportunity cost.
[01:13:50] And boy was this a big one? What a mental model to get stuck into. And it started with this idea of scarcity and the trade-offs that come [01:14:00] with that scarcity of our. And we learnt a very compelling lesson that there is no such thing as a free lunch because every choice has a value. And then, we've traditionally thought about profits as ones and zeros, but we discovered there is psychic profit.
[01:14:15] And then. Idea that there is so much more to the cost of something than just the receipt, just the invoice. There's all of those social drivers and there's implicit and explicit costs. And it's all about knowing what you're giving up. When you make a choice to whether it's from the cup of coffee that you drink in the morning or to it, whether it's how you spend your time, everything has a cost.
[01:14:42] Everything has a benefit. And if you use the opportunity cost model, you will get the most out of your money out of your day, out of your week. You'll beat on the way to being the best version of yourself. And we're doing that every single episode here on the moonshots master seals. All right, that's it for [01:15:00] the show.
[01:15:00] That's a wrap.