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Opportunity cost is an important idea to keep in mind. However, there are some other factors which are also important. For one, money now is worth more than mo
by tikhonj 14y ago
Opportunity cost is an important idea to keep in mind.
However, there are some other factors which are also important. For one, money now is worth more than money later. It's easiest to imagine future earnings discounted based on how far in the future they are; I think traditionally they are discounted exponentially.
Another is that time worked is not necessarily linearly proportional to productivity. Perhaps for the most menial of assembly line work this is true, but for creative endeavors like programming it isn't. In fact, working more can make you less productive in an absolute sense!
You also have to keep your risk tolerance in mind. That is, a 1% chance of earning $1000 is not the same as a 10% chance of earning $100.
And, of course, opportunity cost also applies to all sorts of resources like money (especially in some liquid form) as well as time. This is something to keep in mind if you plan on investing money in something illiquid.
In short: opportunity cost is important, but so are a bunch of other things.
- saraid216 14y agoThis can actually be captured with the simple recognition that opportunity cost is not entirely monetary, but rather it's about value. "Money now" has more value than "money later". This is described using a http://en.wikipedia.org/wiki/Value_function http://en.wikipedia.org/wiki/Value_function > It's easiest to imagine future earnings discounted based on how far in the future they are; I think traditionally they are discounted exponentially. It's called http://en.wikipedia.org/wiki/Temporal_discounting http://en.wikipedia.org/wiki/Temporal_discounting
- olalonde 14y ago> It's called http://en.wikipedia.org/wiki/Temporal_discounting http://en.wikipedia.org/wiki/Temporal_discounting For larger amounts of money, it is also important to consider the time value of money: http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Time_value_of_money
- zacharyvoase 14y agoThe first point you raised is 'time preference', which is simply the discounting we apply to future or uncertain income over immediate value. The second one is 'marginal utility', which is perhaps best described as the difference in value of a litre of water to a dehydrated man in a desert vs. a man who owns a desalination plant.