Pre-emptive regret

Opportunity Cost

SOURCE: Flickr user polytropos

Part of ‘basic training’ in any business school is understanding opportunity cost, the measure of lost opportunities (or opportunities forgone) when you choose one strategy or path or project over others. Calculating your opportunity cost is essentially an exercise in pre-emptive regret — if I spend my money, or time, or attention on this particular thing, will I eventually wish I would have spent it another way?

In financial decision-making, opportunity cost calculation is all about the numbers. An investment that will net me six percent annual gain is awesome. But if that same money could have earned me seven percent elsewhere (or by staying where it is), I should dump the original plan. Sure, many or most of the numbers you use for these calculations are guesses about the future, and may well prove flawed. But the point of the exercise is to bring a clear and cold eye to the way you allocating scarce resources.

When expected returns aren’t financial, but something else (aesthetic, civic, social, educational, communal, and such), opportunity cost assessments get squishy. Will the world have been more beautiful or transformed if I presented that other play rather than this one? Still, smart cultural leaders have to try, at least, to be sure they’re spending their own resources (time, talent, money) in the ways that move their mission forward most effectively.

Opportunity costs are also the soft, exposed underbellies of most community impact arguments for the arts — economic impact, civic impact, educational impact. Because, really, if our community’s goal was to revitalize a downtown, and we’re spending our collective money toward that goal, we’d consider your $10 million cultural facility pitch against every other way we could spend $10 million to advance the goal (better roads? subsidized retail? more security? a statue of The Fonz, perhaps?).

At the end of the calculations, though, opportunity costs are best considered a lens to see your resource decisions with different eyes. There may well be a different choice that returns something better on one variable, but misses an opportunity on another. And, since so many of us are working in nonprofits that are designed to explore the places traditional markets won’t go, we should certainly run the calculations, even if we ultimately decide to be guided by Robert Frost.

 

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Comments

  1. Sherri Helwig says

    Andrew, I would pay good money for a glossary of arts management terms written by you. In particular, I would like to see all of the witty cross references (“Opportunity Costs” – see also “Pre-Emptive Regret” and “Soft, Exposed Underbellies of Impact Arguments”).

  2. Andrew Yarosh says

    I’m with Sherri on this. Especially since it will help us in those wonderful moments when folks from the for-profit world (Board Members, offerers of Free Advice, etc.) tell us we need to run our organizations like “real businesses.”

    BTW, my usual response to the latter (with a wink and a smile) is, “You mean like Enron?”

  3. Anna says

    Sherri has a great point! I think you and the rest of the faculty (and maybe some wise students/alumni, wink wink) should create a dictionary, but perhaps in the form of a language translation tool: the first half defining phrases in terms of the non-profit world and the second half using for-profit. How neat would that be? In my experience, it would be very useful when working with board members and even corporate donors and sponsors.

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