Rebirth of Reason

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Friday, April 15, 2016 - 10:54amSanction this postReply

Joe wrote (with my emphasis added):

It makes little sense to discuss opportunity cost for past choices. If you did, you'd almost certainly find "opportunities" that would have been more profitable, and so you'll always see your decision as being costly. But since you couldn't see the future, this kind of analysis is useless.


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Friday, April 15, 2016 - 12:14pmSanction this postReply

Cost, like length or weight, has to have a unit specified before there can be a measurement.  Joe addresses cost measured in dollars and draws important distinctions between measuring past costs versus estimating future costs.  As is usually the case, I don't disagree with Joe and instead his articles fire up my imagination and make me think... whereupon I end up going off on a tangent.  Tangent follows.



Costs are most often measured in dollars expended, but they might be measured in happiness foregone (or postponed), or they might be measured in lost future flexibility (sometimes a path might be taken that looks like it will bring in less profit, but will leave a company positioned in a place that leaves them more flexibility in changing directions).  Decreased safety or increased liabilities are costs.  We spend money on insurance, like auto insurance, which is a cost measured in dollars, but we look at the options and decide that security from future costs that might be very high (e.g., if we have an accident) mean that we will choose to experience the lowest risk form of a cost.  Note that we easily denominate and measure this in dollars, but it is financial safety or security we hope to buy.  And, besides, dollars are not intrinsically valuable but rather a medium of exchange, a store of value, and, when possible, a common denominator to use for comparing what otherwise would be apples and oranges.


And it is a bit more complex than that since units often exist in a hierarchy.  For example, a business will always be able to assign some dollar value to future alternatives in order to decide which way to go.  But if it cost X to get to some future state where the company will have Y flexibility to, say, change directions on marketing, then there will end up being some relationship between dollars and flexibility - and this will be terribly dependent on context (how much will the company need liquidity in the future?  How many dollars are available now?  How much variabilitiy might there be in the value of flexibility in the given area?  And so forth).  Or, take safety.  How many dollars do you now have in your annual budget?  What will the marginal value of dollars that would be needed to increase insurance coverage on your house?  Will your future budget be going up or down?  If someone has an opportunity to play pro-football, he has to measure the possible costs to his health in the future weighed against the salary offered. 


Because something gets denominated in dollars for comparison purposes shouldn't disguise the fact that some other value is in play (safety, security, flexibility, happiness, etc.) or that the denomination formula is context dependent.


Measurment itself has a cost.  Nathaniel Branden was a young man in New York and Alan Greenspan came by his apartment.  They were going over to Rand's, if I remember the story accurately.  He told Greenspan, "I'll be with you in a minute, I just have to check the laundry I just got back to see if it is all here." Greenspan asked him if in his experience over the years he had lost enough items of clothing to justify the time it took to check what came back against the list of what he sent.  Nathaniel said that was the last time he stopped to count his socks and shirts.  One of the costs of that needs to be measured is the cost of the measuring.  When I was running large software projects, I had to decide how much to budget for testing, which is the most critical measurement of software's readiness for release and usability.  Reliability of medical software would get a higher value than for other kinds of software.  That is where the context changed the denomination factor.


Sometimes it costs more to measure than we get back; but other times, unless we do more measuring, we won't even know how much we are loosing by not measuring more.



Human nature is such that we move forward by imagining alternatives and then choosing between them.  Knowledge of facts, theories, beliefs, combined with emotional tugs, hungers, impulses to follow the herd, or just doing what we've done before... these are some of the inputs to our uniquely human method of steering a path through life.  Done properly, it requires using reason to measure those imagined alternatives.  Because measuring costs is critical to the examination of imagined alternatives, measuring costs must be seen as critical to human functioning as such.  And to do it correctly requires monitoring our process, adjusting our focus, and questioning and adjusting our process.  It's iterative and evolves when we do it right.

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Monday, April 18, 2016 - 8:57amSanction this postReply

Cost of Immediacy


There are many instances of this, which I won't try to frame as past or future, opportunity or real.

- Paying more to deliver or receive X faster than alternative methods. FedEx was built on that desire.
- Paying a higher airfare due to booking shortly before travel. This is very prevalent in business.
- Upon arriving at an airport paying for a taxi versus waiting for a much cheaper shuttle.
- Interest from the borrower's perspective. Wanting to buy X now versus X later often requires borrowing money and paying interest. A prime example is mortgage interest.


In all these the profit or loss isn't in terms of money only. It is also time.

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