In our previous blog we explored the notion of Distraction and its associates, “Procrastination” and “Important”. In this blog we’ll discuss an old term, Opportunity Cost.
On BBC, there is a programme, The Chase. It is a quiz show with a panel of normal people who pit themselves against a brilliant expert in general knowledge. At a point in time when the panel has come up against the expert, one person on the panel is chosen to pit themselves against him or her but with a twist. Let’s say the panel has scored UKP8000. The chance is then given for the panel to win, say UKP60000 or, if the expert progressively answers correctly, the panel loses, say, UKP2000. So, if they lose, they get UKP6000 but, if they win, they walk away with UKP68000. Of course, the panel can choose if they risk UKP 2000 or they try to win the additional UKP60000. This is an example of Opportunity Cost – if you play it safe and then beat the expert, your opportunity cost is UKP60000. Just to put that in our terms, that’s a whopping, R1000000! But, if you lose, UKP2000 is taken off your current winnings.
Opportunity costs exist in almost every decision to a greater or a lesser degree.
Opportunity Cost occurs as a result of having alternatives in a set of decisions. If, by doing one thing you prevent yourself from doing another, you may have just caused yourself a cost of opportunity. We do it all the time, negotiating our way through life’s complex paths. Risk-taking always implies opportunity cost. As in The Chase, you walk into one thing and leave another. Of course, it may be possible to do both or to undertake a hybrid of the two but, it is always the chance of upside or the downside that drives our decisions.
Here are some examples:
– You choose to marry Jane and not Sarah. Time tells if you made the right decision, remembering that your opportunity cost, might be measured in opinion only.
– You chose to remain in a Corporate and retire on a pension rather than set out on your own and create wealth. Here, if you succeed in business, you score but if you fail, your opportunity cost would be the pension you could have had.
– You decide to have children. The cost is measured in Rands of education and care. The alternative may have been loneliness and the absence of familial care in old age.
And so it goes. The thing you left behind as you made the call to proceed in a particular direction, is the opportunity cost of the decision. Sometimes it is great and sometimes what you chose could prove much better than the action from which you walked away. Time tells in real life. In business decisions, the decision-taking is a lot more mathematical and models of forecasts, discounted cash flows and the likes are used to aid the decision. But even the richest of companies makes decisions to leave one thing and do another, always probably based on a reduction of expense or an increase in profit.
Where does this leave us when it comes to Distraction? Well, distraction either causes the wrong or a delayed decision or, distraction may cause a particular route to be followed when it was obvious to the focussed observer that the other should have been chosen. In such a case, the opportunity cost of delay or an incorrect decision could be significant. One area where I am feeling huge opportunity cost at the moment is in our SA politics. The current leadership is not putting us back 8 years being the two terms of the president, but rather a decade and more. Pravin Gordhan speaks about 10 years to recover from a full junk status and if that occurs before Christmas, that means 8 years of Zuma and another 10 years of recovery. In all of that, we all get poorer and the Poor become completely destitute. If we embellish on that with some of the social unrest scenarios, the ruin is unimaginable. I have recently read Jacques Paauw’s book and in the course of it, I stepped back and began to think of the reading that I have been forced to do to stay abreast of the scenarios in our beautiful, tortured country and the negativity contained in these books. I thought about the effort that it has taken to investigate and expose the “bad” and the amount of Distraction that it has caused a nation. Imagine if the only books selling at the moment were studies and success stories of green energy, water purification initiatives, farming methods, advanced financial planning and wealth creation, inexpensive building technologies, self-driving cars for public transport, etc, etc. – just imagine!
You see, the Distraction that corruption has brought has induced an immeasurable Opportunity Cost for our nation and her Peoples. Thus the travesty for me of the current leadership crisis is not even what we have lost, but what cost we have foregone with the amazing opportunity that democracy and the former leadership engendered for us. We live in hope that something occurs in the next year or two that completely changes the trajectory we’re currently plotting. In this regard, Zimbabwe has just got interesting and we wish a better outcome for her Peoples.
But back to us and what we can individually control. The cost of Distraction is immeasurable even in our own lives and circumstances. We need to be mercenary when considering what we spend our energy on. Time is of the essence when we choose, by design or default, to focus on the Unimportant in our lives. By pursuing a senseless decision or strategy, we waste the actual time expended but we also may bring about setbacks that last much longer. In your business, the relationship with your children, your marriage, Distraction and its associate, Opportunity Cost, lurk to waste your efforts and impede your success. Take control. As we’ve made the point before if you don’t, somebody else will. You don’t need to get paranoid about every decision but just take one or two “big rocks” and begin to practice Focus as opposed to Distraction, and estimate the Opportunity Cost of your alternate decisions. Great strategies are as much made up of what you do not do, as they are of what you do.
Homeloan Junction is practiced in these issues and no doubt has examples of where Opportunity Cost went against them over time. We learn from our mistakes and sometimes learn best from them, unfortunately. Point is a discussion with those who have been before you can always help when you are making decisions with uncertain outcomes. Strength to your arm as you manage the choppy waters with which we are faced. Hopefully, as we’ve discussed before, you will continue to enjoy the current level of activity of the market as it certainly feels like Property has held its own in difficult times.
Yours in Property.