Understanding Opportunity Costs

Opportunity costs is a term used in economics to explain that for every decision made in business (or personally) there is both an opportunity and a cost associated with that opportunity. If you have never been exposed to opportunity cost before it may not make a lot of sense, so I will summarize the concept in simple terms so you understand this very important concept.

Let’s say you can only have either chicken or hamburger for dinner tonight, but not both. The opportunity to have chicken will cost you the opportunity to have hamburger. Likewise, if you choose to have hamburger, it will cost you the opportunity to have chicken. The opportunity cost analogy can be applied to every decision we make, every waking moment of our lives. When you wake up in the morning, you can choose to wear slippers or shoes but not both. If you choose shoes, it will cost you the opportunity to wear slippers and vice versa. Give this some thought and you will see that you make decisions on how to use your time and if you spend time at one task, it will cost you the time to apply to the next task and so on. The opportunity to stay awake cost you the opportunity to sleep. The opportunity to get married costs you the opportunity to be single. You get the idea. The key is to grasp the enormity of this concept in your daily life and just as importantly, how you spend time at work or in business.

You are either unemployed, employed, self employed, a business owner or an investor. And in each case there is an opportunity and an associated cost. Can you determine what the opportunities and costs are?

I am a BIG believer in getting educated and knowledgeable about a matter before leaping into any project. I am rarely impulsive because I have learned that impulsive actions have consequences that usually cost more than the opportunity to be impulsive, and this is especially true in business. In other words, the opportunity to be impulsive costs me the opportunity to be managed and controlled. However, the opportunity to be in control costs me the opportunity to be impulsive. I choose control over impulse because the probable outcome tends to be more positive rather than negative.

I come from a poor family in Detroit, Michigan and was fairly uneducated before I first started in business some 20+ years ago. I met a man named Doug Wright, a commercial attorney in Toledo Ohio. He was a professional, smooth, well spoken, articulate, tall and charismatic man who commanded whatever environment he was in. I, on the other hand, just a young guy of 25, was ignorant, naive, arrogant, and a wet behind the ears know it all. Doug saw something in my personality that inspired him to mentor me and it was the best thing that ever happened to me. Doug was able to gracefully show me how much I didn’t know contrasted to his vast knowledge and experience. And being the competitive person I am, I went to the library and took out business books on marketing, sales, management, philosophy, etc. I had to get on a more level playing field with Doug who had degrees coming out his Ying Yang. I got smarter fast but I didn’t have a degree to compete with Doug. So I spent thousands of dollars to get a degree in business. And I got licensed in real estate. And I was a commercial mortgage broker. And I wrote books that went national. And many more accomplishments that few people ever have a chance to obtain. All the accomplishments were achieved because I wanted to know how the world spins, what makes one business a success while another fails. But the opportunity to get all this education cost me tremendous amounts of time and money. Doug passed away last year and I lost a good friend.

But coming from a poor environment and “thinking I knew what was going on” versus actually knowing what was going on, was a vast difference in reality. I knew I could help people, like me, who wanted to know how it REALLY works in business. I knew I could help people who could not afford an education. I could give people the opportunity to get smart fast without the corresponding costs typically associated with education. So, in 1990 I started a publishing company called Smart Books Publishing and we created easy to read books covering real estate and business. The whole premise behind Smart Books was to provide a way for people of modest means to get their hands on high impact information that gave them the information they needed to succeed in business. To see the bigger picture, make better, more informed decisions based on facts rather than guesswork. I knew I could give people like me an opportunity to get educated without the cost of time and money that I had paid.

And where did this inspiration come from? I was reading an Entrepreneur magazine one day and I saw an ad for a “How to Become Commercial Loan Broker” book for $100.00. I reluctantly and skeptically paid $100.00 for the program thinking it was a scam. When I got the book, I read it thoroughly and it was jammed packed with insights on how to put together bank packages, how to fund business loans and commercial real estate mortgages, etc. That single book inspired me to try and be a commercial loan broker. As a result, I met major financial players around the U.S. including real estate developers, Investors, commercial mortgage bankers and I originated over 32 million dollars of commercial real estate for financing. None of this would have happened If I would not have invested $100.00 in that mortgage program. It was the single best educational investment I ever made. Did it have all the answers? No. But it gave me enough insight to be able to talk to the pros that mentored me in the business. And these experiences combined are what inspired me to create Smart Books. The only difference is that Smart Books products are all less than $50.00, so more people can afford the products.

And what does this have to do with opportunity cost? Here’s the answer: If you lack education in business or real estate you have choices. The opportunity to get educated will cost you time, effort and maybe some money. But what is the cost of not getting educated? Not taking action on education, especially if you are thinking of starting a business, or buying a home or whatever you are thinking of has the potential for cost immeasurable.

The opportunity to click the link below will cost you the time and effort to click the link and check it out. But what’s the cost of not clicking the link?

Copyright © 2006 James W. Hart, IV All Rights reserved

Source by Jim Hart

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