What’s the best investment you’ve ever made, emotionally, financially, socially, etc?
Full episode script
Judging the value of investments – even if they don’t involve cash – can be notoriously difficult. There’s all kind of logical fallacies that can get in the way, not to mention measuring the value of an emotional investment is, by definition, difficult to do logically
Even with all of that, it can be an interesting exercise to apply the language of investment and financial management to other things in life – or the financial decisions you’ve made.
At the base level, there’s a few different kind of investment measurements of cost — incremental cost, opportunity cost, and sunk cost.
Incremental cost (and it’s best friend incremental revenue) is the cost and revenue difference between two alternatives. If it’s financial considerations, then it’s easy — if option A is $100 and option B is $250, there’s a $150 incremental cost. If option A will earn you $150, and option B will earn you $500, then the incremental revenue is $350.
When you’re talking about non-financial considerations, then the incremental cost might be more like the time you’re spending, or even the amount of emotional energy it takes.
The opportunity cost is less of a comparative measure and more a consideration of what you’re giving up. The amount of time, money, energy, or whatever other measurement criteria you choose on a choice will, by virtue of the resources available, preclude some other choices. Choosing option Q means you cannot choose option R.
And while it’s tempting to think that the opportunity cost is a sunk cost… nope. That’s very different. One of the things that I love about taking a financial and investment mindset towards other decisions is the idea of sunk cost.
So you’ve spent five years building something. Or you’ve dumped $1,000 into what seemed like a good idea. And there’s no way you’ll get that time or money back, but you’re facing a decision thinking “well, I’ve already invested…”
But in reality, a sunk cost is sunk. You’re never getting it back, so given that, you’re freed to make the decision or to consider your decision based on the here and now. Opportunity cost, values, incremental cost — all those things that measure where you are, instead of where you may have been.
This script may vary from the actual episode transcript.