Nate’s Notes 8: Opportunity Costs & Effective Altruism

How much money does it cost to save the life of a child who would otherwise die from a preventable disease? This is a question that Matt Wage, a philosophy student at Princeton, figured out. He then calculated how many lives he could save over a lifetime, assuming he had an average income and donated 10% of it to a charity that saved lives…for example, a charity that provided bed nets to children to prevent malaria.

Based on his calculations Matt figured he’d be able to save 100 lives over his lifetime. He said to himself, “Suppose you see a burning building, and you run through the flames and kick a door open, and let one hundred people out. That would be the greatest moment in your life. And I could do as much good as that.”

When Matt graduated from Princeton he was accepted to Oxford for post graduate studies, a dream school for a Princeton philosophy grad. But Matt turned down the offer, and instead took a job on Wall Street at an arbitrage trading firm. Matt had so much academic promise. So why go to Wall Street? Because Matt understood a very simple idea…and he took that idea very seriously. He understood the importance of opportunity costs.

Charlie Munger, one of the greatest investors of all time, calls opportunity costs a superpower, “to be used by all people who have any hope of getting the right answer.” But what is an opportunity cost? Simply put, an opportunity cost is everything we give up for the things we choose. In other words, if I choose path A, I have simultaneously chosen to not take path B or C. Every book we choose to read is a book we can’t read, and every person we choose to date is a person we choose to not date. There is only so much time in a day, only so much time in a lifetime.

So how do we decide to spend our time. As a friend of mine frequently reminds me, there are more opportunities than resources in this world. The best framework I’ve ever heard for making decisions is the good, better, best framework. Just because something is good, doesn’t mean we should do it. Every minute we spend doing something good, is necessarily a minute that we could have spent doing something better or even best.

So returning back to Matt Wage, the Princeton philosophy grad. Matt chose to work on Wall street because he figured that with a higher income, he would be able to save more lives. Had Matt chosen to go to Oxford, his opportunity cost would have been all of the money he could have earned on Wall Street…and all of the lives he could have saved. And one year after graduating, Matt was already donating a six figure sum, nearly half of his income, to charities that save lives.

Obviously not everyone who is facing the same decision as Matt would make the same decision. But Matt’s decision making process is admirable.

Peter Singer, the Ethicist who was Matt’s ethics professor describes Matt as an effective altruist. Effective altruism is based on a simple idea: we should do the most good that we can. We should always strive for best, rather than settling for good and better.

When thinking about your day, your career, your relationships, and even your lifetime, please remember opportunity costs, and think about effective altruism. Try do the most good you can do.

It’s a simple idea. Please take it seriously.