When microeconomists mention an “opportunity cost”, they mean the value of the next best alternative to the chosen one. Every decision involves giving something up. 

The opportunity cost of a late networking event at work is kissing your child good night. The opportunity cost of watching live rugby match is going for a long training run. The opportunity cost of being a hands-on mum for a woman is advancing her career. 

This concept is so important because it can be applied to every aspect of your life and encourage you to examine your choices comprehensively. If you want a bit more of A (e.g. status at work), you must give up some of B (e.g. leisure time). 

The opportunity cost of a night in is the money you are saving on dinner and drinks out. Suddenly binging on Suits on a sofa looks a bit more sexy, especially if after a while you can treat yourself to cocktails at Dabbous. 

The opportunity cost is also a handy concept to apply to your savings and investment decisions. 

Say you have received a bonus for all your hard work last year. Let’s say you are only considering two options: pay down some of your mortgage as a lump sum or put money into a savings account. Your mum tells you to pay down your mortgage, but with an economist’s hat on, you should compare the interest rate you are currently paying on your mortgage with the savings rate offered by your bank. Right now interest rates in the UK are low (the base rate is 0.5%), so chances are you are on a good deal paying just 2% interest. Many banks are currently offering saving rates of 3%, so leaving all other factors aside for the moment (e.g. tax implications), you can see that the opportunity cost of paying down some of your mortgage is forfeiting extra 1% interest you could earn on saving cash. 

The concept of opportunity cost helps us estimate true economic costs of every decision or venture. If you have a spare room, your opportunity cost of keeping it as an occasional gesture of hospitality to your mum and dad is earning extra income. Conversely, getting a lodger has an opportunity cost of having to share your kitchen and your fridge plus any other inconveniences you may come up with. 

Consider a former fund manager starting her own business making chutneys. Let’s assume she made £140,000 in a year selling chutneys and made a profit of £40,000 after taking into account all the costs. However, to estimate her true economic profit, we would also need to take into account the salary she would have made as a fund manager. The salary she decided to forgo is he opportunity cost of running her own business. (Of course, you may argue - correctly so - that running her own business has additional benefits too: greater freedom, doing something meaningful, working on something with a greater economic potential in future. Alternatively, sticking to the concept at hand, the opportunity cost of making chutneys is doing a meaningless job stuck in an office with a bunch of colleagues who bore her to death.)

It’s also important not to mix up opportunity costs with sunk costs I have written about a while back. An opportunity cost of a fancy dress outfit taking up a lot of space in your wardrobe is not £40 you bought it for, but a potential resaleable value on eBay (£4, taking into account all the spilt beer soaked up by the costume, posting costs and the eBay commission). 

The economist Tim Harford is fond of using opportunity costs to help him make daily decisions too. His recent article in FT Weekend has been re-published on his blog. He argues: 

"However dizzying the idea of opportunity cost may be, it’s something we must wrap our heads around. Will I write a book review? Will I chair a panel discussion on a topic of interest? Will I give a talk to some students? In isolation, these are perfectly reasonable requests. But viewing them in isolation is a mistake: it is only when viewed through the lens of opportunity cost that the stakes become clearer.

Will I write a book review and thus not write a chapter of my own book? Will I give a talk to some students, and therefore not read a bedtime story to my son? Will I participate in the panel discussion instead of having a conversation over dinner with my wife?

The insight here is that every time we say “yes” to a request, we are also saying “no” to anything else we might accomplish with the time. It pays to take a moment to think about what those things might be."

What decisions are at stake for you today? What are the opportunity costs involved?

At the beginning of a ski trip I have the hibbie jibbies. I am about to meet seventy strangers for a pre-dinner drink. “Skier or boarder?” “What do you do?” “Have you been to Val d’Isere before?” will circulate the room. “Where are you from?” will be the question I'll get asked a lot because of my accent. There will be dinner conversations and impromptu heart-to-hearts later in the bar. It’s a great opportunity to make new friends and grow a professional network. And yet I feel uneasy at the prospect.

Many people who know me would be surprised to read that. They would consider me an extrovert, relishing the possibility to get energised by other people. Indeed, I am an open, gregarious, outgoing person. I have no problem starting a conversation with a stranger, even someone I hold in high-esteem, but it does not mean I find it easy.

If I were to do a test to determine my character, I would struggle to fit into a neat pattern. Have a look at the Myers Briggs website where an extrovert is identified as a person who “likes getting energy from active involvement in events and having a lot of different activities”, “has a wide range of friends and knows lots of people”, “can understand a problem better when she can talk out loud about it and hear what others have to say”. That’s me! An introvert is described as a person who “feels comfortable being alone and likes things she can do on her own” and “takes time to reflect on an idea.” Wait, that’s me again! 

The trouble with the standard definitions of an “extrovert" and an “introvert” is that they are too black and white. You are either “outgoing and gregarious” or “reticent and shy.” In reality (and Myers Briggs agree), people are not that polar. The most outgoing person may need time for herself to reflect, recoup and spend time in the world of ideas and stories. I have always suspected that a simple label does not fit me or any other person, but it was not until I met Gavin Presman of Inspire, that I’ve realised the obvious: we are all distributed somewhere along the line drawn between the two polarities, and it is most likely that none of us are either 'black' or 'white'.

Gavin helped me recognise another pattern: after a big party or a networking event, I crave solitude. It’s almost like I am on a string, being pulled into one direction, then going exactly the opposite way to restore my inner balance. 

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Once you recognise such patterns of behaviour in yourself, it becomes easier to understand yourself and others. Spotting someone who is mostly an extrovert is easy: they dress for others, whilst those who are mostly introverts dress for themselves. The former might wear high heels or something bright, the latter - comfortable clothes. The benefits of attuning to your circle of friends and colleagues are obvious: you’ll build and nurture better relationships. If your friend is an introvert, don’t invite her to a noisy party cum networking event. If your potential client is an extrovert, take him to a trendy, airy lunch spot (not an intimate cafe) and let him do the talking.

Finally, what is it that irritates us so much about each other? Extroverts seem to say things before they’ve thought about them, which tends to cause trouble. What if we started to appreciate that extroverts are wired that way - they need to put a problem out there in order to tackle it? Introverts appear to be indecisive. In reality, they are just taking time to think things through, it’s their nature and a real asset at that.

Having spent sometime writing this in solitude, I am now ready for the buzz again. In fact, I crave it!