Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked.

Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision-making. The formula for calculating an opportunity cost is simply the difference between the expected returns of each option.

The downside of opportunity cost is it is heavily reliant on estimates and assumptions. There's no way of knowing exactly how a different course of action may have played out financially.

This complex situation pinpoints the reason why opportunity cost exists. It may not be immediately clear to a company the best course of action; however, after retrospectively assessing the variables above, they may further understand how one option would have been better than the other and they have incurred a "loss" due to opportunity cost.

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