Costs, Benefits and Opportunities

This is one of several tools used for “time management”, decision making and just thinking (about anything) in general.

Cost Benefit Analysis (CBA) is probably among the most over-used terms everywhere. Alongside “Opportunity Cost”.

Usually these are associated with businesses or large organizations, but that doesn’t have to be the case.

Many people make use of CBA when it comes to taking vital decisions. Listing “Pros” and “Cons” is one kind of cost-benefit analysis.

But it doesn’t really have to be the case that you use CBA for big decisions. You can use it for pretty much anything.

Costs and Benefits

Every thing has a price and that price is the cost we pay for the benefit we think we’ll get. Tallying the two gives a CBA.

Deciding to do something therefore, means incurring a cost and getting a benefit in return.

So going out for dinner with friends brings its own costs – the time it takes to return, the money you spend, the effort it takes to go and so on. The benefits could be whatever you think you’ll get out of it – good food, company, a change from your routine or anything that you consider of value.

Avoiding something is also a benefit. If you think your friendship would suffer if you turned down the invitation – and more importantly, you want to retain that friendship – you’d include that as a benefit.

The bare minimum criteria to go would be : Benefit > Cost. In other words : Benefit – Cost > 0

If this isn’t satisfied, it’s not even worth thinking about.

This is only a necessary condition, meaning that it has to hold true if you decide to go.

But it’s not a sufficient condition – just because the benefit outweighs the cost, doesn’t mean I’ll decide in favour.

That’s because of opportunity cost – which is what else you could have been doing.

Opportunity Cost

So if a business has a million dollars, and sees the chance to spend the money and get 1.1 million (a profit of 0.1 million or a hundred thousand), should it go for it?

If we looked at Benefit – Cost, the answer would be a resounding Yes.

But if they could put that money in a bank and get 1.2 million, they probably would not go ahead in the first case. Of course, this is ignoring risk and the chance to borrow more money – it’s just a simple example.

Because you can’t compare the difference of Benefit and Cost (Benefit – Cost) with 0.

There’s always something else we could have been doing with our time or money, and that’s the opportunity cost.

Therefore it only makes sense to rephrase it as:

Benefit – Cost > Opportunity Cost

If this is satisfied, you know you’d go ahead with the decision.

So if that business had a chance to get 1.3 million, then they might go ahead (might – because there’s always a risk of losing your money, so you’ll look at that too), because that’s more than what they’d get by putting the money in the bank.

To go back to the earlier example.

Instead of going out for dinner, there could be many other things to do. Read a book, watch a movie, sleep etc. Basically anything you can think of and realistically do.

If I thought that going out was better than all my other options, then it would make sense to go ahead.

It beats the opportunity cost.

Possibility

None of this is particularly new or exciting or thought-provoking.

To those who’ve never thought about it, it might seem robotic / heartless or impractical.

Can anyone actually take decisions like this? If your friends ask you to join them will you really stop to consider all the alternatives and then decide? Isn’t it selfish putting yourself first?

I don’t think it’s robotic or selfish because it’s something any individual already does probably.

The way we don’t hand out our money to others freely – because we value it and put our needs first, and that’s not wrong.

The only difference is that this is usually done unconsciously without thinking about it. And since most people value their money but not their time, they hand out their time freely while being more guarded with their money.

If you’re conscious about this process you can take more informed decisions.

And as to impracticality – I think that’s exaggerated. It sounds strange – to be running through a list of millions of possible alternatives when someone asks you to join them for dinner, but that’s not how it works.

Humans are smarter than that.

We don’t evaluate unrealistic scenarios – so I wouldn’t start imagining that I could be on a safari in Africa instead of going for dinner, because I never seriously considered doing that before.

Even after eliminating unrealistic options there are still lots of scenarios to consider, but here too we can do better.

We don’t function like blind algorithms, going through each element of a list of all feasible scenarios. You already know the one or two top priorities – it could be sleeping or watching a movie or anything – and just need to check whether going out is favourable compared to them. There are usually just a couple of other alternatives that we seriously consider.

Of course, it takes a little determination and perhaps courage to go through with this decision. Even if you know you prefer sleeping to going out with friends, you might still lose courage and accede out of social compulsion.

So it’s not always enough, but being consciously aware of our preferences is the first step to acting on them. And truly understanding and internalizing this – not just reading and forgetting about it – often gives us the determination needed.

Utility

It could be something as big as a decision to buy a car – that’s when this is more explicit.

Or it could be something as minor as debating whether to check your phone if it beeps while you’re trying to sleep, or whether to make the effort to get up from bed to drink water.

Or, since many who read this appear for exams, it could help with that goal too.

Should you join coaching for an exam? The question isn’t “Does coaching help?” That’s asking if the benefit of coaching is greater than the cost in time and money.

The question is always going to be : “Will coaching help me?”

That means asking: Is the value of coaching greater than my opportunity cost?

It doesn’t matter whether it helps other people or whether they recommend going for coaching.

Ask yourself instead – what’s my opportunity cost?

It’s easy to make it more specific if you ignore the monetary cost and look at the time you invest. What could I study in two or three hours on my own? Compare that to what someone could teach you in the same time.

Since I prefer reading on my own, and learn faster that way, I found the opportunity cost was too high, and didn’t join any coaching.

But others might learn faster through classes than self-reading, or simply might not know how to go about studying on their own. For them, the benefit could be greater than the opportunity cost – then it would make sense to join.

Once again – it’s not a question anyone else can answer for you.

Or suppose that the exam is nearing. Time is limited. What should you study?

Investing time in one topic carries the opportunity cost that other topics now have less time.

It makes little sense to divide time equally. If you have one week and seven topics, you probably shouldn’t devote one day to each.

Choose instead the subject where the potential benefit is maximum. Meaning the ROI in terms of “Knowledge gained per hour invested” is highest.

It’s usually the topic you’re worst at or the one you’ve neglected till now – for the simple reason that most of the content you read will be things you don’t know, and hopefully some of that will stick in your mind. In other subjects, you probably know it well and simply re-read (this has some benefit, and you should do it, but you probably don’t want to allocate the bulk of your time to it).

Or if the topics aren’t equal – for example, topic 1 carries 60% of the marks and the rest 6 make up 40%, you’d want to take that into account, adjusting for how well you know each topic.

Finally, it makes it much easier to take ownership of your decisions and avoid blaming others for them if you’ve weighed the costs and the benefits and made your own choice.