In financial terms, what refers to the potential returns lost when choosing one investment over others?

The concept being described is opportunity cost, which represents the benefits or returns that are foregone when one option is chosen over another. In the realm of investments, opportunity cost emphasizes that every decision involves a trade-off; by selecting one investment, an individual potentially misses out on greater returns from other alternatives. This notion is crucial in personal finance as it encourages individuals and investors to consider not only the immediate benefits of their choices but also the possible gains they may be sacrificing.

For instance, if an investor decides to allocate funds into one stock rather than another with a higher projected return, the difference in potential earnings illustrates the opportunity cost associated with that decision. Understanding opportunity cost helps individuals make informed financial decisions that maximize their overall returns.