How to Manage Opportunity Cost: Attention Thresholds in Personal Wealth Building
“What you ‘spect when you level up?
Don’t you know the bosses bigger?”
I rarely know what I’m talking about. Today, the feeling of “I don’t get this, but it feels important and I’ll try to figure it out as I write” is especially strong. The way someone smarter would say this is “low epistemic confidence in this theory.”
We carry on:
I have a friend, a founder, who once said to me “I go to the gym every day. I work out every day. But I’ve been using the same weight for a year. And it’s the perfect metaphor – I just realized that’s the exact same mistake I’m making at my company too.”
He hadn’t been growing. He didn’t use progressive overload. He hadn’t been updating his behavior based on his context.
As I reflect on my last year, the biggest mistakes I see are failures to change my decision-making to suit a new context. I form habits to pursue a specific goal in a specific context. As goals are accomplished, the context changes but the habit remains.
As I work through ideas around Leverage for the course and community, I see similar sticking points for others as well.
Managers who build teams, then find “it’s easier for me to just do this thing.”
Making too-small investments because of an outdated feeling of scarcity.
Starting projects with (much) smaller visions than they could build with current leverage.
They leveled up but don’t change how they play.
The largest, and most invisible cost is always opportunity cost. We miss opportunities for growth constantly when we are not making decisions that fit our context.
Some of this comes from the instinct to play it safe, but much is due to an Incorrect Attention Threshold.
That’s what I’m calling this type of mistake. As you grow, your skills grow, your assets grow, your leverage grows – you need to change what you think about, how you think, and how you decide.
This post is about how to manage the opportunity cost of your time and effort. How to get your Attention Thresholds right, and when to move them.
Opportunity Cost of Worry (Attention Thresholds for Spending)
What is your current “attention threshold” for expenses? What do you spend time and energy optimizing? When are you worrying about things you should ignore?
Nick Maggiulli has an excellent post called Climbing the Wealth Ladder, how people change their spending decisions at different levels of net worth. It shows when people change how they allocate their attention.
When do spending decisions become *individually* trivial?
Nick says, around 0.01% of net worth.
Do your math… what is 0.01% of your current net worth?
What expense decisions are around that size?
Here is how Nick shows the concept changing over time:
Level 1. Paycheck-to-paycheck: $0-$0.99 per decision
Level 2. Grocery freedom: $1-$9 per decision
Level 3. Restaurant freedom: $10-$99 per decision
Level 4. Travel freedom: $100-$999 per decision
Level 5. House freedom: $1,000-$9,999 per decision
Level 6. Philanthropic freedom: $10,000+ per decision.
What does this mean?
“It depends” – because this isn’t financial advice. It’s just an idea from a guy on the internet.
If you have a million-dollar net worth, you can probably stop clipping coupons. (Unless, of course, you’re a retiree who won’t be earning more and needs to make $1m last 20 years under conditions of uncertainty. See? The context matters.)
It does suggest your attention may be better placed on getting a good deal on your next car, which will save thousands of coupons worth of money with less time and energy.
Important Note: This refers to Net Worth, not Earnings. Your net worth is what you’ve saved and invested, not what you’ve earned. If you’re constantly upgrading your lifestyle and spending as much as you earn, your net worth isn’t changing and you cannot afford to change your attention threshold.
If your goal is peace of mind, independence, safety, freedom… then save, invest, and increase your net worth. To achieve “peace of mind” keep your desires below the attention threshold of your current wealth level. If you do, you never have to think about money or feel constrained, and you have achieved abundance. Congratulations!
Opportunity Cost Increases: Attention Thresholds for Earning
Our attention to spending adjusts to context, so should our attention threshold for earning.
I would not accept the same job on the same terms I would have a few years ago. (I made this mistake a few times this year. I have to re-calibrate my reaction to opportunities. I said yes to not-super-duper-fun things with rewards below my Aspirational Hourly Rate.)
How should we calibrate our threshold for earnings? When should we get excited about an opportunity?
There are a million ways to make a million bucks, bolivars, or bitcoins… so “it depends.” It depends on how your decisions relate to your income. Do you decide every day whether to go do a job for a customer? Or get a new client quarterly at your freelancing business? Are you on salary? How do you invest?
As I thought about this, I tried to do the same rough order-of-magnitude math we used for expenses.
I care about spending at 0.01% per decision, but I make those decisions daily. To keep this comparison sane, let’s use the same “threshold per individual decision” concept here.
I think 1% is the closest order of magnitude for individual earnings decisions. When I had no money, I would do odd jobs for $10, return cans, sell items, or pick up minimum wage day labor gigs at <$10/hour.
I cared a lot about getting a return of 1%+ of net worth at every point in my life.
If I’m going to spend time to research an investment, risk capital, monitor news, and think about when to sell… I can’t manage a ton of them, and my time is scarce. Therefore, I gave myself a new rule to manage opportunity cost in investing: I should be prepared to invest the amount necessary to at least move my net worth by 1% if the expected outcome happens.
On the other hand, placing a single bet with the expectation of doubling (100%) my net worth in the short term means I’m probably using an alarming amount of my current capital.
Example: Someone with a net worth of $1m would put effort into finding a rental house that returned $5-$10k/year, and would have the capital to comfortably invest in that without making a huge (%) bet.
You’ll hear super-wealthy investors (and on Shark Tank lol) say things like “you’re not offering me enough of your company to get me to care.” At first it sounds like they’re just being an asshole, but they have a high attention threshold. Novice founders think their odds of getting an investment is higher if they ask for less money – this is not true. A wealthy investor ($10,000,000+ net worth) has to see a way for them to earn ~$100,000+ (1% of net worth) on their capital and time… or it’s not worth them thinking about, doing the paperwork, or answering your calls.
And you should be thinking the same thing. If you’re doing something for the purpose of driving a return… make a big enough bet that you can move your net worth by 1%.
Here I tried to organize the earnings increase a bit, and give a few examples of how opportunities change over time.
As your net worth grows, and your attention threshold changes, you outgrow certain opportunities. Most jobs do not have opportunities to give you raises for $10,000, and even fewer for $100,000.
As your net worth grows, more of your decisions will revolve around capital allocation. You will become an investor and founder more than a role-player in order to keep impacting your net worth at 1%+ chunks.
Level 0. Working hard, increase earnings power: $10 per decision
Level 1. Working hard, increase earnings power: $100 per decision
Level 2. Working + Passive Investing: $1,000 per decision
Level 3. Part-time Investor: $10,000 per decision
Level 4. Investor: $100,000 per decision
Level 5. Founder/Whale Capital Allocator: $1,000,000+ per decision.
You can see this concept echoed in Nathan Barry’s excellent post, The Ladders of Wealth Creation: a Step-by-Step Roadmap to Building Wealth. This was one of the seeds of inspiration for this post.
This graphic is a beautiful summary of the concept of the post – your earnings increase over time as you broaden your skills and increase your leverage.
Early in your journey you trade time for money, but as your time becomes more valuable you work on new, scalable opportunities like productized services or pure, high-margin products.
Let’s put it all together.
The Big Picture of Personal Wealth Building Strategies
I put all this together into one chart to see how it all looks in context.
The area of focus changes as net worth increases. At the earlier stages of net worth, it’s far more important to focus on saving than investing.
If your net worth is $10,000, it is much easier to save $10 than to earn $10 on your capital. As net worth increases, the impact of investing increases, and the impact of individual saving decisions decreases.
The higher your level, the more expensive your opportunity cost. When you don’t shift your attention threshold properly, your opportunity cost maybe 10x more than you think.
Discipline never goes out of style
I am nervous to publish this post, because I don’t want it to be misinterpreted. This isn’t a license to be frivolous and ignore the details of financial discipline. This is an encouragement to value your attention, effort, and time in changing context.
Good financial discipline is better than not. We’re not here to forget the massive value of compounding. Every dollar you save is more like ten dollars, but that’s a different post. Today, we are here to focus on what matters most in changing contexts.
Managing Opportunity Cost
And what matters changes. As the context evolves, the strategy must evolve. The largest, and most invisible cost is always opportunity cost. If you’re not thinking about it, you’re spending a lot for the privilege.
You can’t build a big company without delegating details.
You can’t build an empire without tackling bigger opportunities.
Think about the context your decisions are being made in, and manage your opportunity cost by being certain the actions you’re taking will have a meaningful impact in your context.
When you level-up, don’t forget to change your strategies.