No Free Lunch Theorem

OPPORTUNITY (COST) KNOCKS

There is a cost, and a gain, for everything. Thus the phrase "Opportunity Cost". Even if someone else pays the meal ticket, you have paid with your time. Beyond a full stomach, what did you gain (or lose) from the "free lunch"? Quite often the lure of the "free lunch" blinds us to the need to carefully compare our options.

EXAMPLES

An individual in need of obtaining a mortgage shops for the lowest interest rate. He locks into the lowest interest rate, but the lender never gets him to the settlement table because of delays that result from having gotten the "best" rate.

An individual is buying a house and insists on offering the lowest price. Instead he should have paid a higher price and let the seller contribute to his closing costs. The potential opportunity cost? A slightly higher price may have persuaded the seller to share your closing costs.

An individual doesn't want to pay commissions on stock transactions, instead enlisting a discount broker. The opportunity cost here: You may lose the personal interest necessary to monitor the market and your own trades, and stop investing wisely and consistently.

THE BOTTOM LINE

Compare carefully before you choose your opportunity, keeping in mind these axioms:

If it sounds good to be true, it's probably false.

You get what you pay for... but only if youre paying attention.