Everything in Life is a Trade-off: A Basic Theory of Tradeoffs and Opportunity Costs
Life is all about trade-offs and “opportunity cost.” If one thing increases, another must decrease, and gains and losses must be considered.
Definitions of Trade-offs and Opportunity Costs
- A trade-off is any situation that involves losing one quality or aspect of something in return for gaining another (if I have an A or B choice, and I choose B, then I don’t choose A necessarily, that is the trade-off).
- Opportunity cost is an economic term that, when applied to all aspects of life, can be seen as a formal or informal calculation of the loss of potential gain from choosing one alternative over an other (if I choose A and not B, then the loss of the potential gains of B is my opportunity cost).
- Cost is a cost of any value of any sort, in the long or short term, implicit or explicit. Factors that impact value include scarcity, use value, and more. Learn more about the many different types of value.
In other words, when one makes a trade-off in any walk of life, they gain some things at the cost of other things. One cannot have their cake and eat it too.
Said plainly, whenever we make choices, we generally consider the implications of both choices, and have to consider not only what we get from our choice, but what we lose from “the road we didn’t take.”
TIP: The video below explains the economic concepts of trade-offs and opportunity costs. We then apply these economic concepts to all spheres of life, formal and informal, below.
Trade-Offs and Opportunity Costs.
TIP: Our bias factors heavily into informal reasoning (and often formal reasoning). This can cause us to make trades with higher opportunity costs than we realize at the time.
Tradeoffs and Opportunity Costs in Socioeconomics and Beyond
In our lives, trade-offs are a nearly constant rule.
We constantly find ourselves having to trade one thing for another, and thus the basic economic rule of opportunity cost, applied in an informal form, is nearly a constant as well. We constantly have to weigh the loss of one thing against the gains of another (even if only using informal logic and all the fallacies that can come with it).
In any situation, a choice needs to be made between several mutually exclusive alternatives. Generally, some choices will be better than others, but not always. Opportunity cost is the “cost” incurred by not enjoying the benefit that would have been had by taking the other choices.
In other words, whether we are writing up a business plan, deciding whether to get health plan A or B for our employees, deciding to go to school X or Y, deciding to invest in asset C or D, or deciding whether to have chocolate or vanilla ice cream “when one path is chosen, another one isn’t, and there are implications” and “when something is taken, that which is gained by one, is diminished from somewhere else.”
Trade-offs and Opportunity Cost Cake Metaphor
Let’s use a cake metaphor to better illustrate all the implications of the above.
There is a saying that says “we can’t have our cake and eat it too.” This is generally true. If you eat the cake, even if you take a bite, you diminish the cake. You trade delicious cake calories for less cake, your cost is less cake and more calories, your reward is delicious bites of cake. You decided to eat a cake using informal logic, you weighed your options, and the situation was rather economic.
Now, there are all sorts of ways around this:
We can replace the cake, trading money for more cakes. Or we can charge admission to our cake eating, thereby actually increasing our money supply and thus increasing the amount of money we have to buy cakes… but that will be a trade-off of time and likely weight gain..
You can be very clever, but at the core of anything physical (and most things logical, ethical, and moral) there is a trade-off.
It is simply impossible to literally eat a physical cake and expect it to be there afterwards. When you nibble at a cake, it is diminished around the edges.
Balance, moderation, and the laws of physics are the laws of the land, it is very hard to get anything for “free” (one must always expend energy to do work). Further, what we take, and how fast we take it, and what general choices we make all have impacts.
For every action there is a reaction, for every action there is a trade-off, for every trade-off the principles of opportunity cost apply.
There are countless ways to express this, but knowing the basics should be enough for you to take the cake and run with it (yes, this page will use food metaphors; get over it).
TIP: We can use a cake metaphor, or a pizza metaphor, or a pie. We can even not use metaphors. However, whatever choice we make means excluding other choices.
Tradeoffs and Opportunity Costs.
Trade-offs in the Physical, Logical, Ethical, and Moral Spheres
As noted above, a trade-off is any situation that involves losing one quality or aspect of something in return for gaining another.
That is true for any aspect of life.
In economics it is money traded for a service, labor traded for capital, or a product traded for a product. Whatever choice is made has an implication, whatever choice isn’t made as an opportunity cost.
Can the slaver cheat by forcing their slave to work for free? Not really. This unethical horror isn’t cheating, it is just an unfair trade (unfair trades are the closest we get to cheating, but a toll is always being paid).
When one cheats, a lot is being traded. For example, the slaver is trading their moral value for capital.
Thus, this brings us to a complex point. A pound of flesh can be traded for debt, we don’t always have to trade dollars-to-dollars or dollars-to-donuts. We can make all sorts of odd trades.
If I decide not to read a book today, the trade-off may be that down the road I don’t know the final question on jeopardy. If I cheat on a test, I trade ethics for a good grade.
The idea that the physical must always be traded for something physical isn’t exactly right. A bowl of food can be traded for an action, an action can be traded for an idea, etc.
I would express this as: While the rules of physics are constant, one can trade between the physical, logical, ethical, and moral.
The Art of the Trade, Cheating, and the Realted Metaphysic Morals and Ethics
We generally think of trades as economic, as trade-offs in business, or as political, as trade-offs between policy and politics for example (what we might call the economics of politics), but trades happen everywhere.
With this in mind, knowing how to make a good trade and informally consider opportunity cost between the physical, logical, ethical, and moral (between the different areas of life) is a key to managing your own life and to interacting with others.
Ideological absolutist solutions don’t tend to work, because if a person comes to the table offering nothing to trade, they are taking an absurd position which spits in the eye of the natural law.
Likewise, when a person comes to the table tactically offering to trade away something they never held (such as taking a position so extreme the middle ground is still toward your side), then the trade was simply unequal and the tactic rather unethical (even if the outcome is beneficial).
This isn’t a comment on morals and ethics though, it is a simple truth… people don’t like being cheated. If someone realizes they were cheated in a trade, even if the person got away with it, there is a sort of cost.
We can get clever, but the art of politics isn’t just the art of criminality and “the will of the stronger,” where “a good deal” is one that benefits the party making the trade. Deal making is, more a thing of ethical justice (a sort of metaphysical law of the universe). It is the aristocratic art of dealmaking, the art of the trade-off.
To be a master, requires one to master not only the physical laws, but the logic, ethics, and morals as well. It requires you to make a beneficial trade with a low opportunity cost, that doesn’t leave a karmic mark on your head after (but instead makes people on the other end of the trade feel like they got a good deal too.)
When we discuss global trade, we can say words like fair market or free market, but the proof is in action. Did we really consider ever factor? Is it that sometimes fair is found in a deal that benefits others more than yourself economically in the short term, but benefits all in moral and ethical ways in the long term by say “lifting all ships?”
When we trade glass beads for gold, we make an unequal physical trade. When we make an unequal physical trade, we also trade away some morals, for we have traded away some degree of ethical justice. It always works like this, this is how trade-offs work in conjunction with the human condition.
We can argue that trading away morals and ethics is just mumbo jumbo, that this won’t take a toll on the one who bartered away their morals for a fist full of silver… but on the other hand, its hard to argue that the average person can ever really wipe their conscious clean or not walk away a little changed and skeptical of others if they make it a habit to cheat.
The core virtue here is equity, no one respects a barter who doesn’t come to the table with some virtues. A barterer without principles is something lower than a gangster or caveman (as even they have morals and ethics).
The true art of dealmaking requires an uncommon mastery of things, a mind for mathematics, a just spirit…. and a little bit of cunning.
This being a true principle of economics applicable to nearly all areas of life.