Suneet Singal on opportunity cost

Suneet Singal's decisions pages sit beside the podcast The Opportunity Notebook with Suneet Singal, and this one takes up opportunity cost, the value of what a choice uses up. The idea is older than any episode, and this entry does not attribute a private formula to him. His published professional background is in real estate and corporate finance, where time, cash, and attention are constantly spoken for by the next bidder, including the quiet option of waiting. Opportunity cost is the value of the next-best use of the same resource. The price on a receipt is only part of that value. The rest is the path you cannot walk because you took this one. David R. Henderson's encyclopedia entry and Frederic Bastiat's story of a broken window are the public texts this page leans on. A labeled hypothetical later in the entry uses invented numbers so the arithmetic is visible. Those numbers are not a study, a forecast, or a recommendation.

The value of the next-best use

David R. Henderson, in the Econlib encyclopedia, defines the opportunity cost of a resource as the value of its next-highest-valued alternative use. His example is ordinary and exact. If you spend time and money on a movie, you cannot spend that time reading a book at home, and you cannot spend the money on something else. If reading is the next-best use, the opportunity cost of the movie is the money plus the pleasure you give up by not reading. Henderson notes that the word opportunity is almost redundant, because cost already means the value of the best thing you did not choose. The extra word is a reminder. People hear cost and think of a charge. The reminder turns their head toward the use that will not happen.

That turn of the head is the whole practice. Before you praise an option for what it produces, name the best thing it prevents. The best thing is not every thing. A list of twenty fantasies is not an opportunity cost. It is a mood. The opportunity cost is the single next use you would actually have chosen, valued in whatever unit the decision cares about: hours, dollars, a quiet evening, a skill practiced, a reserve left intact. If you cannot name that next use, say so. An unnamed opportunity cost is still real. Pretending it is zero is how a busy option wins against a blank page.

Suneet Singal's published background is in real estate and corporate finance. Those fields talk constantly about what a dollar or an hour could have done instead. This page does not describe any transaction of his, and it does not offer an investment rule. It uses Henderson's definition as a general tool. A household, a club, and a project team can all ask the same question a finance discussion asks of a dollar: if we commit this here, what is the next use we are declining? Write the answer in a sentence. The sentence is the cost that the receipt forgot.

Bastiat's broken window

Frederic Bastiat's essay What Is Seen and What Is Not Seen begins from a hard observation. An act produces a series of effects. The first arrives with the cause and is seen. The others come later and are not seen. In the parable of the broken window, a shopkeeper must replace a pane. The glazier is paid. A bystander says the accident is useful because it keeps trade moving. Bastiat asks the reader to look at the use the shopkeeper's money would have had if the pane had stayed whole. That purchase, the one that does not occur, is unseen. The glazier's gain is matched by the loss of the unseen purchase, and the shopkeeper is poorer by a window. The story is a lesson in opportunity cost told as a street scene.

The parable is easy to nod at and easy to forget the moment a visible benefit appears. A new activity creates jobs, photos, and a sense of motion. The motion is seen. The afternoon those same people would have spent on the next-best work is not in the photograph. Bastiat's point is not that repair is foolish. A broken window should be fixed. His point is that the repair's visible benefit is a bad reason to be glad about the break, because the alternative use of the money has been skipped. The Econlib biography of Bastiat and the Liberty Fund edition of his selected essays are the public places to read him. This page retells the parable as a habit of looking, not as a slogan.

Use the parable as a question you can ask without any politics attached. What is the unbroken-window use of this hour, this room, or this budget? Who would have received that use, and is their loss in the notes? If the answer is embarrassing because the alternative was better, the embarrassment is the information. If the answer is that the alternative was worse, you have a reason for the choice that is stronger than the fact that something visible happened. Visible is not the same as valuable. Bastiat's glazier is visible. The unseen purchase is the cost.

Time and attention are resources too

Money is the example people expect, and it is not the only resource with a next-best use. An hour given to a meeting is an hour taken from the work the meeting is about, or from rest that makes the next day's work possible. Attention given to a vivid crisis is attention taken from a quieter problem that may be larger. Henderson's logic does not change when the resource stops being cash. The next-best use is still the measure. Teams that track dollars carefully and track attention not at all will often discover that their true scarce resource was the calendar of the person everyone needed in the room.

There is a discipline in naming the next use specifically. This meeting costs us the treasurer's Tuesday morning, which she would have spent closing the books. That sentence can be true or false, and it can be checked with the treasurer. Meetings cost time is true and useless. It does not say which use lost. A named loss can be accepted. An unnamed loss gets romanticized into busyness. The page on second-order effects asks what happens after the first result. Opportunity cost asks what never starts because the first result took the inputs. They are neighboring questions. One looks forward along the path you chose. The other looks at the path you left closed.

Attention has a further trick. The option that demands a decision in public often beats the option that would have been wiser and is silent. Silence has no advocate in the meeting. Someone has to speak for the next-best use, or the use with the loudest advocate will spend the resource by default. Assign that speaking role if you need to. Ask one person to arrive with a single sentence: the best thing we will not do if we say yes. Thank them for the sentence even when you still say yes. A chosen cost is cleaner than a cost you discover on Friday in the form of work that did not happen.

Henderson's illustration about college

Henderson uses a numerical illustration, and it should be kept as his illustration. He asks the reader to imagine a student who pays $4,000 in tuition at a state college, with a government subsidy of $8,000 per student. It looks as if the year's cost is $12,000 and the student pays less than half. Henderson then adds the income the student forgoes by studying instead of working. In his illustration, if the student could have earned $20,000, the true cost of the year is $32,000, and the student bears $24,000 of it, tuition plus forgone earnings. He also notes that room and board are not a true extra cost of attending if the student would have paid for room and board anyway. The figures are Henderson's teaching numbers, published in the encyclopedia entry. This page did not measure anyone's tuition or wages, and it does not advise anyone to attend or skip college.

The illustration is useful because it shows a seen cost and an unseen cost in the same arithmetic. Tuition is on a bill. Forgone wages are not. A person who compares only bills will misstate who pays. The same pattern appears far from campus. A fee of zero can sit on top of a large forgone use of time. A fee that looks large can be small beside the value of the hour it protects. You do not need Henderson's particular numbers to copy the structure. You need a seen line, an unseen line, and the honesty to label which numbers you measured and which numbers you assumed. If you do not know the forgone wage, write unknown rather than zero.

James M. Buchanan's Cost and Choice, which Henderson cites and which Econlib makes available, presses the idea that cost is tied to the chooser's alternatives. You do not need the whole book to use the caution. Cost is not a property painted on an object. It is a relation between the option you take and the option you decline. Change the declined option, and the cost changes, even if the price tag does not. That is why two people can face the same sticker and bear different opportunity costs. Their next-best uses differ. Ask whose next-best use is being spent before you announce that something is cheap.

A labeled hypothetical about a Saturday

This is a labeled hypothetical. The amounts are invented for the arithmetic, and they are not a wage survey, a budget recommendation, or a story about Suneet Singal. A community garden treasurer, Priya, has a free Saturday and a standing offer to cover a paid shift at her other job. For this exercise only, the shift would pay $160. The garden has also asked her to spend the Saturday rewriting the watering schedule, a task she is uniquely placed to do because she knows which beds failed last July. If she takes the shift, the schedule waits a month, and the garden keeps using a rota that wastes water. If she rewrites the schedule, she forgoes $160 of pay. The opportunity cost of the garden Saturday, in this hypothetical, is $160 plus whatever rest she also gives up. The opportunity cost of the shift is the month of a better rota, which the garden values, for the exercise, as worth more to the beds than $160, and which Priya may or may not value the same way.

Write both sides before anyone calls the garden work unpaid, as if unpaid meant free. Unpaid means no bill. It does not mean no next-best use. Priya's next-best use has a number in this story because the story invented a shift. In real life the next-best use might be a shift, a family visit, or sleep, and only some of those have a wage. Put the non-wage uses in words. The method survives the change of unit. What it cannot survive is a blank where the alternative should be. If the garden board says the Saturday is free because Priya is a volunteer, the board has described the garden's cash account and ignored Priya's alternatives. Those are different ledgers. Thaler's work on mental accounting, taken up on the sunk-cost page, explains why ledgers get separated. Opportunity cost asks you to put the next use back into the same conversation.

The hypothetical also shows a choice that can be reasonable either way. If Priya needs the $160 for a bill due Monday, the shift may be the better use, and the garden's delay is the cost she and the board should name rather than hide. If the July failures were severe and she can spare the pay, the schedule may be the better use, and the $160 is the cost to name. The lesson is the naming. The story does not crown a winner. It refuses the sentence that either Saturday is free.

When a low price is still expensive

A low sticker price is a poor summary of cost. Henderson's student pays a tuition that looks like a fraction of the year's true cost once forgone earnings are included. A club can accept a donated room and still spend its scarce weekends. A team can take a no-fee software tool and spend a month of attention moving its notes. The donation and the no-fee tool are real kindnesses or real bargains in cash. They are incomplete descriptions. Ask what you will not do during the month the tool consumes. If the answer is nothing we value, take the tool. If the answer is the project the tool was supposed to help, the bargain is eating its purpose.

Bastiat's unseen purchase hides in discounts the same way it hides in repairs. The seen effect is what you got. The unseen effect is what the time, the space, or the remaining budget will not buy. Write a line under every attractive price: next use declined. If the line is hard to write, you may be looking at a default rather than a decision. Defaults feel cheap because nobody had to argue for them. The page on narrow framing warns that one small yes, judged alone, can look harmless. A year of harmless yeses is a spent calendar. Opportunity cost is the tool that puts one yes back next to the yeses it displaces.

None of this is an instruction to hoard. Spending a resource on a high-value use is the point of having the resource. The error is spending it without looking at the runner-up. A chosen, named opportunity cost is compatible with a joyful yes. An unnamed one is compatible with a resentful Friday. The difference shows up in the notes, not in the tone of the announcement.

Write the forgone option in the notes

Make the opportunity cost a line in the decision, not a cloud around it. The line needs a noun. We are declining the treasurer's Tuesday on the books. We are declining the $160 shift in the hypothetical, or the family visit, or the sleep. We are declining the purchase the shopkeeper never makes in Bastiat's story. A noun can be challenged. A cloud cannot. If someone says the next-best use is different from the one you wrote, you have a better conversation than if they say the whole thing feels expensive. Update the line. The cost is allowed to change when the true alternative changes.

Keep the line next to the decision sentence from what decision you are actually trying to make. A cost without a decision is a worry. A decision without a cost is a wish that has not met its runner-up. The memo page is a good place to store both lines. The sunk-cost page is the place to keep yesterday's spending from disguising itself as today's opportunity cost. Money already spent is gone. Opportunity cost is about the use you can still choose. Mixing those two ideas is how people throw good time after a bad purchase and call it consistency.

When you have written the line, decide. Accept the cost or decline the option. Say the acceptance out loud if other people are paying it with their time. A volunteer whose Saturday is the cost deserves to hear that the group knows what it asked. That acknowledgment does not replace the hour. It does stop the group from calling the hour free. Henderson's redundant word, opportunity, is a courtesy to the alternative. Extend the courtesy in the notes, every time the choice is large enough to miss later.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

Keep going with sunk costs, which are not opportunity costs, and with second-order effects. The decision those costs attach to is named on what decision you are actually trying to make.