But not all costs are the same.
There are three kinds of costs that people get confused about, but understanding them, really understanding themâin your bonesâunlocks opportunity.
Opportunity cost: If you eat the cupcakes, you canât also eat the brownies. Every time we choose to do something, weâre choosing not to do something else.
Sunk costs: If youâve invested time or money in something (a law degree, a piece of real estate, a bag of chips) that money is gone. All you have left is what you bought, and that is a gift⊠a gift from your former self. You donât have to accept the gift if itâs no longer useful to you. Using a gift still has real opportunity cost, and if itâs keeping you from doing something better, walk away.
Marginal cost: How much extra does this decision cost? For a subscriber, the marginal cost of watching one more show on Netflix is zero. The service costs the same regardless of how many shows you watch. On the other hand, the marginal cost of a tuna sandwich is equal to what it costs to replace the ingredients. It makes sense to prefer things with a lower marginal cost if everything else is similar.
Iâve never encountered a person who was fully rational in making decisions on any of these three sorts of costs. Thatâs okay. But letâs do it on purpose.
