Accounting for opportunity cost is the practice of assessing the value of the alternative choices given up when selecting a specific financial course of action. For instance, an investor may need to decide whether to invest in the stock market or a real estate property. The opportunity cost of choosing the stock market would be the potential return on the real estate investment that is forgone.
Calculating opportunity cost allows decision-makers to allocate resources efficiently and make informed choices. Its relevance extends to fields such as financial analysis, investment decisions, and project management. Historically, the concept of opportunity cost has been attributed to the Austrian economist Friedrich Hayek in the 1930s.