Opportunity Cost

Opportunity cost is the difference in cost between a choice and its next best option. The loss of potential gain by choosing an alternative. Even though the concept arises from a financial point of view. This can be applied to almost any kind of decision making. Every decision is a trade-off and the opportunity cost is just an indication on how much we are actually trading off. The risk free rate used to compare different investment options is another application of the opportunity cost. When we decide to spend time on a task, we are inherently deciding not to spend that time on something else. That will have a consequence or a “cost” attached to it. When you choose to buy a house we are saying no to renting one, moving to another place etc. All these options have an opportunity cost attached to them.