DevExpress Newsletter 24: Message from the CTO

24 March 2010

Now that we’re doing my Message from the CTO in the DevExpress newsletter as a video, I’ve had a couple of requests to make sure that I publish the text as a blog post. Here’s the Message from Newsletter 24 (the video is here):

Opportunity Costs

Last time I talked about sunk costs and the requirement to ignore them when making decisions between two different strategies.

This time, I want to talk about opportunity costs. In one sense it's fairly simple: if you have a decision to make about two mutally distinct outcomes, the opportunity cost of selecting the best choice is the next-best choice.

Suppose you have the choice of spending $15 on going to the movies or buying a DVD. If you select to go to the movies, your opportunity cost is the DVD. If you buy the DVD, the opportunity cost is the trip to the movies. In software development, opportunity costs come up all the time: we often have to make a decision about which project to take on, given a choice, and the opportunity cost of choosing a particular one is the best idea we didn't choose. Note that opportunity costs are not necessarily monetary, but can be related to anything else of value to the person deciding.

Closely related to opportunity cost is the notion of "There ain't no such thing as a free lunch", or TANSTAAFL ("tan stah full") as I tried to pronounce it when I first came across it. The free lunch term came about in the days when saloons in the States used to offer a free lunch to patrons who ordered a drink. In reality, the lunch wasn't "free" (that's free as in beer to quote Richard Stallman) but was paid for because the drinks were priced higher and patrons would usually have two or more drinks. In other words, tan stah full says: to get something we desire generally means giving up the opportunity to get something else. It "costs" us in some sense to make the choice; it is not free. This is opportunity cost.

At Developer Express we use the term sometimes to explain why we don't add a particular feature or control. We recognize that a given idea is valuable, but, since we have limited resources, we can only do it by not doing something else. The opportunity cost of doing a possible new feature over here is not doing another feature over there, and that second feature may in fact be more valuable in terms of revenue. However if enough people vote for or pester us about the first feature, it may be more valuable in terms of goodwill, for example. Opportunity costs may not be monetary, remember.

So, when thinking about what course of action to take, you should not only discount your sunk costs, but also consider your opportunity costs. Harder to evaluate perhaps, but definitely worth thinking about.

3 comment(s)
David Shannon

Hmmmm....  First a message on sunk costs, now one on opportunity costs.  

Are you preparing us for an announcement regarding the fate of one or more existing DevEx products?  Or is this a web-based university where I can get a PhD in economics in three easy lessons?  

Either one is ok with me, as long as it's not my ox that gets gored.  (I think that's covered in lesson three on NIMBY...)

27 March, 2010
Michael Proctor [DX-Squad]

Julian,

I would like to say that I have been enjoying these "educational' words.

I personally have never really thought much about which decision i choose, I have looked at it and decided on many factors. Your insight into Sunk and Opportunity Costs has been great insight and provided me a better understanding on how my decision should be "bias'd". I have had on several occasions added things into my app because of the "people with the pitchforks" mentality, however the yet to be customers, who can't use my product yet until a certain function is added have to wait even longer. This has cost me in $$$ which for a startup is critical, but so too is Goodwill.... oh the joys of development.

Thanks for the great posts.

27 March, 2010
David Shannon

I just re-read my comment above and it sounds a bit sharper than I meant it.  

I probably should have put one of those smiley-face things at the end, but I hate to do that.  Too reminiscent of old sit-com laugh tracks...  

27 March, 2010

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