06 March 2007

What do I really want?

Economists have a different way of quantifying cost that most of us. It's easily illustrated with an example: buying a candy bar at a vending machine. Let's say you have exactly the eighty-five cents in your pocket that each item in the machine costs. Most of us would say that the price of the item is, rather obviously, eighty-five cents. But an economist would say that it's not just the money you actually pay for the item, but also the utility cost of what you otherwise could have done with that eighty-five cents. In other words, buying a Snickers is eight-five cents plus the cost of not buying a Twix. The cost of options not chosen is called the opportunity cost.

This concept is actually very useful when evaluating the decisions you make about your life. In my case, choosing to be a doctor weighs against choosing not to be a banker or a consultant. Given that I can extract my expected happiness (utility) from my future career in medicene, what I have done makes economic (if not fiscal) sense. The utility gained from not being a banker outweighs the utility gained from not being a doctor. Thus, given a willingness to return to school (be it business school or medical school) it makes more sense for me to be a doctor: lower opportunity cost.

However, if my extracted utility falls below a threshold then the equation no longer holds and I would be better served returning to my previous career. Everyone has this threshold, the question is: where? Some people will go to any school and apply as many times as necessary to get into medicene - their utility difference between medicene and everything else is very large. Mine is smaller. I will not simply attend any school to which I am accepted and I will not apply year after year. This is because some of my utility is derived from my level of excellence within a given field. If I come to perceive that I would be a better banker than doctor, that will drain some of the utility from the propect of being a doctor. For better or worse, which schools you are accepted into and how many times you have to apply is a proxy for your projected ability within a field. It may not be 100% accurate, but it's a readily available metric.

This description probably all sounds very cold and calculated, but it's not really. It's simply the logical functioning of how you weigh different amounts of happiness. It quite rightly integrates the happiness lost by letting go of an opportunity. Think about how many times you have done something because the alternative - always wondering - was worse? The opportunity cost was greater than the negative outcome - it was too high not to act.

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