Opportunity Cost and the Pre-Mortem

Considering opportunity cost and/or performing a pre-mortem with our ideas help us better understand risk and mitigate fear.

Photo of Moss Pike
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Thanks to some fantastic contributions on risk-taking and failure on The Guild (on which, see below!), I was reminded of the idea of "opportunity cost" and the pre-mortem method of analysis, which can be quite useful in helping us to better understand risk and failure, before embarking on a project.

I recently came across opportunity cost, or the value that we risk losing by not pursuing a particular option that's popular in the business world. Imagine we had the option to buy Apple stock in 1997 but elected not to do so. How much money did we leave behind by not jumping on the purchase? That's the opportunity cost in a simple example. Given the other ways we can measure "value" of any given decision, though, we can measure opportunity cost in a number of different ways that are far more complex (e.g., financial value, social value/social capital, time, etc.).

In discussing risk and fear of failure beside innovation, considering opportunity cost can be helpful in measuring risk, perhaps even helping us to see the risks in different terms. Before making an important decision to tackle a particular innovation, for example, we can try to measure the opportunity cost of not saying yes (what happens if we don't do it?), while ideally measuring our assumptions in the process. How does the opportunity cost of a decision reveal our assumptions about it? In my experience, we don't ask these questions enough, which help to grow our fear of failure.

In the same way, Daniel Kahneman, in his exceptional book Thinking, Fast and Slow, discusses the similar idea of the "pre-mortem" (cf. a guide to the pre-mortem and a summary of the idea) The gist is to consider all the things that can go wrong or pretend the idea failed and discuss why, before beginning a project. What's the worst thing that can happen? By thinking about this question before we make a decision, rather than looking back on it with 20-20 hindsight, we can hopefully gain more objectivity about our expectations for the project, improving it in the process (and again measuring our assumptions more accurately).

Opportunity cost and the pre-mortem could both make great conversation and collaboration points within a team, and as such, they could go a long way toward developing culture, helping us to embrace risk. I'm interested in thinking through them in greater detail over the coming weeks.

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Photo of Joy Hurd

All great points. I'm a huge fan of Kahneman's work, and I think that the related concept of loss aversion is a big hindrance to risk-taking and innovation (we hate losses--of time, of money, etc.--more than we love gains). It would be interesting to think of loss aversion and opportunity cost together: how can we frame the failure to take risks and innovate as a loss/cost for the school or organization?

What I love about the pre-mortem idea is its embrace of pessimism, which is often, I think, seen as an undesirable--and not particularly useful--quality in a team member. Pessimism about a project's success might be the best way of identifying flaws, risks, assumptions, etc. Optimism is key for any individual or team, but unchecked optimism can end up blinding us.

Photo of Moss Pike

Thanks for sharing your thoughts, Joy, and I think you're absolutely right. You've reminded me about loss aversion and how it should be considered within the bigger question here--I hadn't made the connection between the two. And I also love the alternative view of pessimism you've described vis-a-vis the kind of blinding optimism that can dilute our thinking. I'd like to explore loss aversion and pessimism in the "checklist" idea I've been thinking about.

After finishing "Thinking," I wrote some thoughts on it, focusing on "for exchange" vs. "for use" goods and the different attitudes toward them that Kahneman describes (cf. http://cinisetfavilla.blogspot.com/2013/12/what-happens-if-we-dont.html). How might we emphasize opportunity cost and risk as a good thing by thinking in terms of "for use" ideas and the endowment effect that we ascribe to things we own and actually use?

Thanks for bringing these ideas back to the center, Joy, and I'll be looking forward to exploring them in greater detail in the next phase!