Monday, October 28, 2013

Embracing Either/Or and Opportunity Costs

Tonya at Budget and the Beach wrote a thought provoking article last month that, among other things, discussed the dichotomy of the "either/or" versus "both" approach. In a nutshell, she posited that when you are presented with two good options, there are benefits, especially as a freelancer, of choosing "both" rather than one or the other. The either/or mentality represents a self-imposed glass ceiling of sorts, that unnecessarily limits your potential. While I agree that having both is a great option, this post takes the counterpoint and argues the merit of choosing between two good options.

The main characters in 30 Rock do a great job of illustrating this dichotomy. The plot device that drives the show is Liz Lemon's ongoing desire to have it all: the big career and the storybook romance and a family and a social life, to boot. Cue the inevitable failures, and hilarity ensues. Jack Donaghy, at times, provides the counterpoint: in business and in life he makes quick decisions between alternatives based solely on logic. To Jack, having it all is an illusion. Though he, too, is faced with dilemmas from time to time that tempt him to try and have both options, like when he tries to juggle relationships with a hot young newscaster, Avery Jessup (Elizabeth Banks), and an old flame from his youth, Nancy Donovan (Julianne Moore). When he tries to logic his way through the decision via the H.E.A.R.T. technique (Hard Equations and Rational Thinking), the results keep coming up even. Even darts don't help.

Liz and Jack's attempts to have it all are understandable. Choosing "both" spares us from the stress of having to make a tough decision. Part of the attractiveness of the concept of "both" is that you don't actually have to choose. But, normally, due to the finite nature of our finances and our time, we have to make a choice. And understanding the finality of those choices, along with their costs or trade-offs, can be a healthy exercise. Having to choose between two good options invites the beneficial process of prioritizing our goals and activities. And as Liz Lemon shows, there are consequences from trying to have it all.

But if we commit to our either/or choices, there are trade-offs. You get one thing, but give up another. In personal finance terms, our choices always have opportunity costs. Rather than fighting against the opportunity costs of our decisions or trying to sidestep them, it's helpful to embrace the option we are choosing, as well as accept the loss of the thing we are giving up, rather than chasing after both.
  • When I decided to commit to my wife, what I gave up was the ability to play the field. I get my awesome wife, but give up on the world of available single women. This is an insanely good deal for me, but lots of men get into trouble when they don't understand or accept the trade-off they have made. Trying to get both sides of the bargain will eventually just result in another tradeoff: you now get to play the field again, but you lose your wife.
  • When I pay off consumer debt or make extra payments to my mortgage, the trade-off is not being able to invest that money.
  • When I spend money, the trade-off is not being able to use that money or to pay off debt or invest it or spend those funds on something else.
  • When I watch an hour of television, the trade-off is that I cannot spend that hour with my friends, family, or on any other beneficial activity.
If I embrace the finite nature of my time & money, I start thinking of my decisions more holistically: both in their inherent value, and in their inevitable opportunity cost. As I choose a certain purchase, I am giving up other hypothetical purchases. The house on the beach that I decide to purchase, for as long as I own it, likely eliminates the possibility of the cabin in the woods.

I can anticipate the counterpoint. With the ever-present possibility for additional income, why not have the beach house and the mountain cabin? It's possible to buy both. Especially for entrepreneurs, income has no ceiling. Like Liz Lemon, why not try to have it all?

While I agree that income can be increased to any hypothetical amount, it is still unfortunately, for every year of your life, a finite amount of money. When we look back on the prior year to file taxes, none of us ever writes "Infinity" in the taxable income line of our 1040A. While the sky is the limit maรฑana, in the present our income is some limited figure and our spending (hopefully) is bound by that figure.

And even if my income is for some reason high enough to purchase a second home and that allows me to choose "both", that kind of misses the point. Those two purchases consumed a certain number of dollars that, by definition, can't be used on the multitude of alternative purchases available. As in nerdy discussions of science fiction plot lines, each dollar has an infinite number of possible expenditures in an infinite number of universes but, ultimately, in our universe, can only experience one of them.

Man, these similes are getting sloppy so that means it's time for me to wrap it up.

I'm hoping to give up on the idea of having it all, and to not let that be a depressing notion. I want to accept that having it all is a costly illusion, driven by the hedonic treadmill. When we decide to put extra money into early retirement investments, I want to be okay with the idea that the money now can't go towards meals out that we might really enjoy, or to a nicer Christmas gift, or whatever. And when I spend money, too, I want to be okay with the idea that it isn't being invested and that it's fine to give up on some returns. I want to get to a place where I'm at peace with the choices we make, and the things we gave up when we chose them. Mostly I want to give up on the notion of pushing for "both", and like Phoebe says, just be happy with the "enough" that I have and chose.

Thanks, as always, for reading.


*Photo of Liz Lemon is from jtbrennan at Flickr Creative Commons.

28 comments:

  1. People often miss opportunity costs in both not saving for retirement and making large purchases for items they can't afford. It's a double whammy, time can either be your friend with compounding or your enemy on missed opportunities.

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    1. That's true, Charles. While I'm hoping to take a positive take on opportunity costs often they're so dire that there's no way to spin it in that direction. Missed opportunities can sting worse than any "on the books" loss.

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  2. Thanks for writing such a thought-provoking counterpoint. I agree with you on so many levels. I walk that very fine line between wanting it all, and saying, "hey, I DESERVE it all" with the other side which is what you are saying, which is be sensible and practical. And realistic. Believe me, it's still something I grapple with ALL THE TIME!

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    1. Hi Tonya! I'm so glad to see your comment - I wasn't entirely sure how you'd take the counterpoint post. I completely see your point, too, in that sometimes there really is an opportunity to reach for both (like, as you noted, staying in a great place like SoCal where the only pinch is the cost of living).

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  3. To paraphrase your post, the best thing we try to do is be wise with our spending or saving, and then be happy with what we've done, either way. I certainly don't waste time worrying about the cost of lost opportunities. I try to learn from mistakes, and then move on.

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    1. Hi Bryce,

      I think that's a healthy approach. Opportunity costs are sunk costs, by definition. Maybe it really is better just to move on.

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  4. This is why I think it's important to have your values and goals in order. This way when two opportunities do come up, you might possibly have more of an edge in figuring out which road you'd like to take. I try to only want the simple things or at least a balance of all the things that I consider important. I'm happy with my family, my relationship and I just made a job change that's hopefully for the better. I find that when things are going smoothly in my life right now, I'm more open to making decisions that will better my future (paying more toward debt, saving for retirement) versus the present (going out to eat).

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    1. What a great insight, EM. I have to agree: when I'm feeling good and things are falling my way, it's easier to make the better either/or choice, esp. as it relates to "future" me. It sounds like things are really going better and I'm so happy for your new position. Congratulations, again!

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  5. I tend to not think about missed opportunity cost, which was probably a detriment when I spent frivolously! However, now that I'm more judicious with spending/money, I still don't do so. For me, I think I would get obsessive about it, to the point where my missed opportunity cost is time.

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    1. Hi Anna,
      Yeah, if it got to the point where such an analysis was costing you time (and heartache) it would definitely be a bad exercise.

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  6. "Having it all" is definitely an illusion, though one that many of us fall back on at least to some extent, myself definitely included. One of the key points in all of this is the availability of time in addition to money. You may be able to afford both the beach house and the cabin in the woods, but will you truly be able to enjoy both? There's certainly a point at which less is more.

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    1. That's a great point that I kind of glossed over, Matt. Time is truly limited while income's limits are debatable. So the opportunity costs on our spent (or worse, wasted) time are more dire. Like you noted, even if you have multiple homes...you can only enjoy one at a time.

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  7. You are the king of thought provoking posts! Maybe you can't have it all - but can't you still have what you want? With time anyway? I understand the opportunity costs in every decision but if you figure out what exactly you want you can make your decisions accordingly and eventually, maybe you can have everything you want.

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    1. What a nice thing for you to say, Alexa. I think I have to give credit to Tonya for this one though. It's really her idea...I just stole part of it. :)

      I like the notion of having exactly what you want if you learn more about yourself and get to understand what's really important to you. I think it's possible, but I'm not entirely there yet. My wants are always changing and often are impulsive so, currently, they exceed my ability to satisfy them. Even if I gave my monkey brain everything it asked for, it'd just come up with new wants.

      But, like you noted, if you get past the superficial stuff, I do think it's completely possible to get at genuine wants.

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    2. My favorite part of this is that is shows how important your wants (loves) are. You cannot want (love?) everything and the things you want (love) are the things you will chose with your either or choice.

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    3. Thanks, Lee. That's a great insight. Maybe it's the other way around, like you said: our loves nudges us towards our choices.

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  8. I agree with Alexa...very thought provoking posts you've got. I'm definitely someone who wants to have it all. I think the main reason for this as you mentioned is because I have a hard time making decisions...especially tough decisions. My biggest issue is decisions about time (balancing time with wife's and family vs mine) With on the weekend, it gets busy and now with a baby, time is a premium. With money, I do want it all...want a great neighborhood with good schools...but don't want to pay the price for housing. I still want it all...I can't help it.

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    1. Thank you, Andrew. You and Alexa made me smile today.

      I feel those same things. I don't want to have to accept tradeoffs, especially where I live. I want a great neighborhood feel and a good district for future kids, but want it to be ultra cheap somehow, like around $100k or less. There is a part of me that actually thinks these places exist (my gut is telling me to look in the Midwest and the Rust Belt.) It's completely unreasonable but I don't want to accept that something has to give.

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  9. I just want it all is that so much to ask ;) ?

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    1. Maybe that just comes with living in the Big Apple?

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  10. Great post Done By, I love the analogy of your choosing your wife. What seems like an endless pool of available women, isn's as glamorous as it is made out to be. Great to see your appreciation for your wife!

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    1. Thanks, Jim! That comparison came from my old pastor, and it's stuck with me.

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  11. Maybe there is nothing wrong with having it all especially if it is well-deserved. But then again, what is the point of it? I guess I'd settle for what makes me happy the most even if that means not having it all.

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    1. Thanks, Jen. I guess my point is that having it all is an illusion. When you choose something, it means you don't choose something else. There are always opportunity costs.

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  12. We can't have sloppy similes, can we?

    I always found that the "thing" (technical term) standing in the way of many people when making decisions was the thought that if they actually made a decision, it would be limiting. It's interesting that once you make decisions, it opens up the powerful narrow field where the real decisions lie. I totally agree with you: until you narrow your field you'll never have anything.

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    1. You said it better than I could, Joe. A narrowed field allows us to make real and better decisions.

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  13. Thanks, buddy! I enjoyed writing this one, too.

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