Decision-making and strategy
The opportunity cost of time
The real price of an hour is the best thing you could have done with it instead.
The idea is older than the name. Frédéric Bastiat's 1850 essay "What Is Seen and What Is Not Seen" argued that the good economist counts the effects nobody sees. Friedrich von Wieser made the forgone alternative the basis of a whole theory of cost, from an 1876 seminar paper to Natural Value (1889). The English phrase spread through writers such as David I. Green, whose essay "Pain-Cost and Opportunity-Cost" appeared in 1894. Wieser is often credited with coining the term, but Green's title is the earliest use these sources confirm.
Economists define the cost of a choice as the most valuable alternative you give up. Money makes this easy to forget because the price is printed on the tag. Time and attention come with no tag, so people treat them as free: an afternoon in a meeting, a week rebuilding a tool that already exists, an evening of email. Each of those cost whatever else that time could have bought.
It works because it moves the comparison to where it belongs. "Is this worth doing?" is nearly always yes, since almost everything has some value. "Is this the best use of the next hour?" is a much harder test, and most tasks fail it. Bastiat's point was that the visible result of a choice gets all the attention, while the alternative that never happened gets none.
The alternative has to be real. Pricing every hour at your salary turns rest, play and slow learning into losses, and that is a misuse: you were never going to bill those hours. The idea can also eat itself. Working out the opportunity cost of every small choice spends more attention than the choices are worth, so put the small ones on defaults and save the calculation for the large ones.
Example
In "Obama's Way", a profile published by Vanity Fair on 11 September 2012, Michael Lewis asked Barack Obama about the everyday details of the presidency. "You'll see I wear only gray or blue suits," Obama said. "I'm trying to pare down decisions. I don't want to make decisions about what I'm eating or wearing. Because I have too many other decisions to make." He told Lewis, "You need to focus your decision-making energy. You need to routinize yourself."
Where it applies
Before building an internal tool, compare it with the feature the same engineers would ship instead, not with doing nothing. On an artificial intelligence (AI) team, a week spent hand-tuning prompts for a one-point gain on an evaluation is a week not spent fixing the data. Fix recurring choices (formatter, project template, deploy process) once, so attention goes to the problems that need it.
Think about it
What did you spend most of last week on, and what would you have done with that time if the task had not existed?
Applied it to something real? Log it.
Test yourselfWhy is "is this worth doing?" a weak test for how to spend your time?
Almost anything is worth something. The cost of a task is the best alternative use of the same time, so the useful test is whether the task beats that alternative.
Related models
- Satisficing versus maximizingDecide in advance what good enough looks like, take the first option that clears it, and stop searching.
- Second-order thinkingKeep asking "and then what?" until you have looked at the consequences of the consequences.
- One-way and two-way doorsMake reversible decisions quickly and save slow, careful deliberation for the ones you cannot undo.
- Opportunity costThe cost of any choice is the net value of the best alternative you gave up, whether or not money changed hands.
- Bottlenecks and the theory of constraintsA system's throughput is set by one constraint; improving anything else is wasted effort until that constraint is fixed.