Opportunity Cost

In our work at Obtiva, I increasingly find my self thinking in terms opportunity cost. Simply put, opportunity cost is the benefits that you could have received by taking an alternative action.

Wikipedia describes it as

Opportunity cost, or economic cost,is the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity), or the most valuable forgone alternative (or highest-valued option forgone), i.e. the second best alternative.

In finance, opportunity cost is often considered when taking a position or making an investment. The opportunity cost is considered to be the difference in return between a risk free investment such as a government bond and the alternative investment considered, such as a stock. A guaranteed return (roughly 4% in todays markets) can be expected from a government bond, so each investment should be considered with this alternative in mind.

At Obtiva, we are fortunate to have lots of opportunity at the moment so considering alternatives is important. When considering alternatives, it takes some creative thinking to see all of the possibilities.

For example, opportunity A might generate more revenue in the near term than opportunity B, but opportunity B might be breaking into a new market and therefore in the future may be more desirable. Only by carefully looking at the alternatives can a proper assessment be made.