In Dirty Harry, during that famous bank robbery scene where Harry ends up spouting off his “Do ya feel lucky?” line, Inspector Harry Callahan gets shot in the leg. It is one of the most memorable movie scenes of all time, certainly as iconic as Sly Stallone climbing the steps of the Philadelphia Museum of Art in Rocky.
Not as famous, though, is the very next scene in Dirty Harry, where Harry goes to the hospital to get treatment for his leg wound. Even so, it is a great example of an individual evaluating opportunity cost:
Doctor: Sure, Harry. We can save the leg. (The doc takes out a pair of scissors.)
Harry: What are you going to do with those?
Doctor: I’m going to cut your pants off.
Harry: No! I’ll take them off.
Doctor: But that’s gonna hurt.
Harry: Those pants are $169.76. Let it hurt.
I know. Harry actually said “$29.95″ — but I adjusted the price to account for inflation.
In case you’re still unsure what opportunity cost is, it’s the cost of a missed opportunity — or, in Harry’s case, the measure of what you’re willing sacrifice in order to meet an objective.
Harry evaluated the replacement cost of his pants against the pain he would endure in order to save them; not surprisingly, he decided against buying a new pair of slacks. So Harry’s opportunity cost was the pain he could have avoided by allowing his expensive pants to be cut off.
Financial Opportunity Costs
Here’s another example: Let’s say Inspector Callahan wanted to buy a .44 Magnum for $500. Harry’s opportunity cost of buying the gun includes everything he could have done with that $500 if he didn’t buy the gun in the first place. For example, he may have been able to invest that money and earn a rate of return of 6% over a 12 year period. In that case, his opportunity cost would be equivalent to $1,000 in his pocket 12 years from now.
Opportunity Costs Can Take Many Factors Into Account
That hospital scene is a great reminder that comparisons may be made not only on a dollar-for-dollar basis, but also with respect to quality of life and or personal preferences.
In our everyday life, it doesn’t usually make sense to make decisions based solely on a dollar-for-dollar cost comparison. In fact, emotional factors are a perfectly legitimate reason for making certain decisions. After all, many people willingly pass up the potential for greater returns in exchange for the peace of mind that comes with paying off the mortgage as quickly as possible.
Opportunity Costs Are Unique For Everybody
I have an awesome father-in-law named Tony who is an outstanding car mechanic. He’s retired now, but he’s still a mechanic. As such, it should come as no surprise that he cringes whenever he hears that I pay a mechanic to maintain and repair my cars.
For Tony, the opportunity cost of doing the job himself is much different than it is for me. Not only does Tony know what he’s doing, he has the tools and the place to store them. He also doesn’t mind getting his hands dirty. And since he’s retired, he has the time.
For me, it’s a different story: After I factor in the value of my time to make the repairs, my lack of tools and a general dislike for grease and grime — not to mention the frustration I would be subjected to just trying to finish the task — the costs of paying a mechanic to fix my cars become easy for me to swallow.
The Effect of Personal Preferences
As financial opportunity costs decrease and emotional opportunity costs increase, it only makes sense that we’re more likely to choose what we enjoy doing.
For example, the Honeybee and I decided to become a one-income family after our son was born — even though our net household income would have been greater if she had kept her job. After weighing the opportunity costs, we ultimately decided that the extra income was less valuable than the intangible benefits of a stay-at-home mom.
There are plenty of other examples that I’m sure you can come up with too.
When it comes to opportunity cost, the bottom line is this: Those who take the time to properly evaluate it will improve their financial well-being and optimize the value of their time.
And if you don’t believe me, just ask Harry.
Photo Credit: public domain
(This is an updated version of an article that was originally posted on March 20, 2009)