What Is Opportunity Cost? The Hidden Price of Every Choice You Make

Opportunity cost is the value of the best alternative you give up when you make a choice. Agree to an extra shift on a Saturday and you pay with more than effort: you pay with the day you would otherwise have had, at its best use. Ask an economist what is opportunity cost and you will hear that every choice carries one, because time, money and attention spent on one thing cannot be spent on another.¹

The definition is easy; using it is harder, because the option you give up is rarely in view when you choose. In a well-known 2009 set of experiments, simply describing “not buying” as keeping the money for other purchases made people noticeably less keen to buy.² When researchers pooled 39 experiments on the effect in 2023, it held up but was small, far weaker than the 2009 paper had suggested.³ The practical fix is cheap: before a choice that matters, name one specific, appealing use of the same time or money, and compare the two. Opportunity cost is one of the best-known thinking tools in the mental models toolkit.

What is opportunity cost? Only the best option you pass up

Opportunity cost is what you give up to get what you chose: not every option you passed over, only the best one. The OpenStax Principles of Economics textbook defines it as the value of the next best alternative, and states that every choice has one.¹

Only the best alternative counts because you could only have done one thing with the same hour or the same money. If an evening could have gone to a film, a run or an early night, and the run is what you would have picked, the run is the opportunity cost of the evening you had.

Opportunity cost is not limited to money either. Wikipedia’s entry on the term includes lost time, pleasure and any other benefit the alternative would have brought, and it covers costs you pay out of pocket as well as costs that involve no payment at all.⁴

For everyday choices, this means asking a sharper question. Nearly anything is worth something, so “Is this worth it?” rarely settles a choice. “Is this worth more than the best other use of the same time or money?” does.

How do you calculate opportunity cost?

You calculate opportunity cost by working out the net value of the best option you would give up: what that option would be worth to you, minus whatever it would cost. Then compare it with the net value of the option you are choosing. If the forgone option comes out ahead, your choice costs more than it brings.

A question that has tripped up professional economists shows how this works. Paul Ferraro and Laura Taylor of Georgia State University put a textbook problem to economists at the 2005 Allied Social Sciences Association meetings in Philadelphia, in the US. You have a free ticket to an Eric Clapton concert that you cannot resell. Bob Dylan plays the same night; his tickets cost $40, and you would pay up to $50 to see him. What is the opportunity cost of seeing Clapton?⁵

The answer is $10. Going to Clapton means giving up the $50 of enjoyment from Dylan, but it also means not paying $40 for the Dylan ticket, so the net value forgone is $10. Only about a fifth of respondents chose it, the least popular of four answers, and many reasoned that a free ticket must cost nothing.⁵ In 2012 the economists Joel Potter and Shane Sanders argued that every answer could be defended, so read the survey as a sign of how slippery the idea is, not as a verdict on a profession.⁶

Myth

If something is free, it has no opportunity cost.

Fact

A free ticket still uses an evening you could have spent on your next-best option, so it costs whatever that option was worth to you, net of what it would have cost.

Time needs one more step: a price. Economists often put a money value on time so that hours and money can be compared, as the OpenStax textbook does when it estimates what airport delays cost travelers.¹ Say a freelance designer could spend a free afternoon on paid client work or on rebuilding her own portfolio site. The site’s opportunity cost is the client fee she does not earn, after tax and any costs of doing the work, so the site is worth building only if it is likely to bring in more than that. The figure need not be exact; it needs to exist, so that an hour stops looking free.

Explicit and implicit costs: the price tag and the part below it

Explicit costs are out-of-pocket payments such as rent or wages; implicit costs are the value of resources you already own and use for one purpose instead of another, such as your own unpaid hours or a room in your home. The OpenStax textbook draws the line this way, and a full opportunity cost counts both.⁷

The textbook’s worked example is a professional deciding whether to leave a salaried job to start her own practice. Her rent and staff wages are explicit costs. The salary she gives up is an implicit cost: nobody sends her a bill for it, yet it can decide the case, and if starting the firm means longer hours, the leisure she loses counts too.⁷

The same book notes that for college the opportunity cost can exceed the money cost, because the hours spent in class and studying cannot be spent in a paying job.¹ Career moves follow the same pattern. A full-time master’s degree costs its fees, plus the pay from the job you would otherwise have held, plus the experience you would have gained in it.

1. Explicit cost: the out-of-pocket payment: the price, the fee, the rent
2. Your time: the hours a choice takes, which could have gone to paid work, rest or anything else
3. Income and money forgone: the pay you skip and the other uses the money could have had
4. What you already own: a room, a car or savings put to this use instead of another; no cash changes hands, but it is still a cost

Implicit costs are easy to miss for a plain reason: they never arrive as a payment, so nothing forces you to notice them. When you list the costs of a choice, add a second column for what you already have, such as your hours, savings, spare room or car, and write what each could be doing otherwise.

Everyday examples of opportunity cost

Everyday examples of opportunity cost turn up wherever money, time or attention can go to only one place at once.

A cheaper flat further from work saves rent you can see every month. Its opportunity cost includes the extra commuting time each week and whatever those hours would have held: sleep, exercise, family, paid work. An hour-long meeting with eight people uses eight working hours, not one, each of which could have gone to something else. Saying yes to a new committee at work costs the projects those same hours would have moved forward, so it is worth joining only if it beats the best of them.

Idle money has an opportunity cost too, such as a debt it could pay down or interest it could earn. That is a comparison, not a recommendation: the alternative’s worth depends on rates, risk and your circumstances.

Time behaves differently from money. Stephen Spiller’s 2019 review of the research points out that people keep less of a mental account of their time than of their money, and more often have specific plans for specific hours.⁸ Spare money is much the same whichever day you spend it; an hour on a Tuesday evening and an hour on a Saturday morning are not. The opportunity cost of an hour depends on which hour it is.

Why do people ignore opportunity costs?

The best-known explanation for why people ignore opportunity costs is that the alternative is not in front of them. Judgments lean on what is presented, and the best other use of your money or time has to be imagined. Shane Frederick and colleagues set out this argument in 2009, in a Journal of Consumer Research paper, and tested it with a set of purchase experiments.²

In the first, students at Arizona State University in the US imagined buying a DVD at a sale price. For half of them, the option to decline read “not buy”; for the other half, it read “keep the money for other purchases”. Both mean the same thing, yet the reminder cut the share willing to buy from three in four to just over half.² Later studies in the paper found the same pull toward cheaper options when a price difference was described as cash left over, even when people first listed pros and cons for each option. Thinking harder did not, on its own, bring the alternative to mind.²

The same paper offers a clue about what does work. The authors report, from a further study they describe only briefly, that the reminder about leftover cash was much weaker when it came with an unappealing example of how the money could be spent.² Spiller’s 2011 studies point the same way. People who thought about opportunity costs were less likely to buy only when the alternatives that came to mind were appealing, and people thought of alternatives more often when their budget felt tight or when they were habitual planners.⁹ The remedy is a specific, appealing alternative, named before you decide.

Is opportunity cost neglect a big effect or a small one?

Opportunity cost neglect is real but modest, according to a 2023 meta-analysismeta-analysis: A study that combines the results of earlier studies on the same question into one overall estimate. Pooling makes the estimate more precise, but it cannot repair the studies it pools: a meta-analysis of surveys is still survey evidence.Full entry in the glossary by Allegra Maguire, Emil Persson and Gustav Tinghög at Linköping University in Sweden, funded by Swedish public research councils. Pooled across studies, reminders about other uses for money or time shifted choices only slightly, and the original 2009 results look like an overestimate.³

The study

Moderate evidence

Thirty-nine experiments pooled, and a much smaller effect than the DVD study

Across 39 experiments with about 12,000 participants in five countries, a reminder that the money or time could go elsewhere shifted people’s choices. The pooled effect was small (Cohen’s d of 0.22), the data pointed to publication biaspublication bias: The tendency for studies with striking or statistically significant results to be published, while quieter ones stay in the drawer. Since the missing studies are mostly the unimpressive ones, a pooled result tends to overstate the effect until it is corrected.Full entry in the glossary, and the 2009 experiments stood out as much larger than the rest.³

A small effect sizeeffect size: A number saying how big a difference a study found, not just whether it found one. Standardized forms such as Cohen's d and Hedges' g scale it by how much the people studied varied, so results on different measures can be compared and the same value can mean different things in different groups.Full entry in the glossary like this one means a reminder shifts choices noticeably across a large group while staying hard to spot in one person’s choice. The authors add two cautions of their own: almost all the experiments asked about imagined choices, and more than half were about consumer purchases, so results for other areas, such as public spending, are less certain.³

Replications show where the effect varies. In five online experiments with US adults, Arnoud Plantinga and colleagues expected people on lower incomes to think of alternatives unprompted, but lower- and higher-income participants reacted to the reminder alike.¹⁰ In experiments published in 2020 with members of the Swedish public and international health-care priority experts, Persson and Tinghög found the effect in decisions about public health programs but could not confirm it overall for private purchases; an exploratory analysis found it in younger participants and the reverse in older ones.¹¹ Some researchers argue that under tight constraints people may overestimate what they give up rather than neglect it.³

Treat it as a tendency worth a quick check on decisions that matter.

Is opportunity cost the same as sunk cost?

No. Opportunity cost looks forward: the value of what you give up by choosing now. A sunk cost looks back: OpenStax defines it as a cost already incurred that cannot be recovered and so should not affect the current decision.¹ Together they make one rule: ignore what is gone, and count what you are about to give up.

The two mistakes mirror each other. With sunk costs, people give the past too much weight; with opportunity costs, they give the forgone future too little. A half-finished evening course shows both: the fees already paid are sunk, while the evenings it will still take are an opportunity cost worth weighing. The backward-looking error has its own guide, on why we keep going because of what we already spent.

How to make the forgone option visible before you decide

The simplest way to stop overlooking opportunity costs is to name the best alternative in concrete terms before you decide, on paper or out loud, as the one-phrase reminders in the experiments did.

Make the alternative specific and appealing. “Keep the money” is weak; “keep the money for the weekend away in May” is strong, because appealing alternatives are the kind that shifted choices in the studies. Give time a rough value, either an hourly figure or a plain list of what those hours would otherwise hold. Then check for implicit costs: which of your own hours, savings, space or attention does the choice use? With several options in play, score each alternative against the same weighted criteria so none escapes scrutiny.

Before a choice that uses real time or money

• Write down the single best alternative use of the same time or money.
• Make it specific: what, when and for whom.
• Put a rough value on the time involved.
• List the implicit costs: hours, savings, space, attention.
• Rewrite "no" as "keep this for that", then decide.

Keep the routine for decisions that matter. Running it on every coffee leads toward the stalled, over-weighed choices of analysis paralysis, and a 2022 review of consumer research by Babak Haghpour and colleagues found that weighing opportunity costs does not always help, and discussed how it may bring regret and dissatisfaction with a choice.¹²

The bottom line

Every choice gives up the best thing you could have done instead, and people tend to overlook it, though by less than the first famous study suggested. A named, concrete alternative is what brings it back into view. Before a decision that uses real time or money, finish the sentence “Instead, I could…” and compare the two honestly.