Opportunity Cost: Measuring What a Choice Gives Up
Opportunity cost is the value lost by giving up alternatives when making a choice. Understanding the concept helps individuals and businesses compare options more comprehensively instead of focusing only on immediate direct expenses.
What opportunity cost is
Opportunity cost does not focus on money already spent, but on the value of the best alternative that is given up after selecting an option. It may involve money, time, satisfaction, health, or social impact. Spending money on a vacation, for example, simultaneously gives up the potential return from saving it or using it for another purpose.
How to use it in decisions
To apply the concept, first list feasible alternatives, then evaluate the direct and intangible benefits of each, identify the best alternative, and compare it with the current choice. If the alternative offers greater overall benefits, the decision should be reconsidered. If no alternative does, maintaining the original choice is generally more reasonable.
Understanding it in trading
In trading, selecting one trade, holding cash, or continuing to devote time all involves opportunity cost. Holding cash provides liquidity and safety but may forgo potential returns. Continuing to monitor a poorly performing trade also consumes time and resources that could otherwise be used to find other opportunities.
Original tutorial
https://www.binance.com/zh-CN/academy/glossary/opportunity-cost
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