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Ever feel like you're missing out on something? Well, you are. As American novelist F. Scott Fitzgerald put it: "Our lives a ... Lorem ipsum dolor sit amet, consectetur adipiscing elit. Immo videri fortasse. Ita fit cum gravior, tum etiam splendidior oratio. Zenonis est, inquam, hoc Stoici. Ita prorsus, inquam; Cur tantas regiones barbarorum pedibus obiit, tot maria transmisit? Quaerimus enim finem bonorum. Tu autem negas fortem esse quemquam posse, qui dolorem malum putet. Cur tantas regiones barbarorum pedibus obiit, tot maria transmisit? Is ita vivebat, ut nulla tam exquisita posset inveniri voluptas, qua non abundaret. Duo Reges: constructio interrete. Vide, quantum, inquam, fallare, Torquate. Idem iste, inquam, de voluptate quid sentit? Inscite autem medicinae et gubernationis ultimum cum ultimo sapientiae comparatur. Quod autem meum munus dicis non equidem recuso, sed te adiungo socium. Nam, ut sint illa vendibiliora, haec uberiora certe sunt. Et quidem illud ipsum non nimium probo et tantum patior, philosophum loqui de cupiditatibus finiendis. Polemoni et iam ante Aristoteli ea prima visa sunt, quae paulo ante dixi. Quam tu ponis in verbis, ego positam in re putabam. Tollitur beneficium, tollitur gratia, quae sunt vincla concordiae.
- Ask: ‘what else could I be doing with this time/money and what would that give me?’
As ...
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Miserum hominem! Si dolor summum malum est, dici aliter non potest. Erit enim mecum, si tecum erit. Experiamur igitur, inquit, etsi habet haec Stoicorum ratio difficilius quiddam et obscurius. Videamus animi partes, quarum est conspectus illustrior; Eam tum adesse, cum dolor omnis absit; Duo Reges: constructio interrete. Illud non continuo, ut aeque incontentae.
Qui igitur convenit ab alia voluptate dicere naturam proficisci, in alia summum bonum ponere? Si mala non sunt, iacet omnis ratio Peripateticorum. Si verbum sequimur, primum longius verbum praepositum quam bonum. Nihil opus est exemplis hoc facere longius. Nihil ad rem! Ne sit sane; Quem Tiberina descensio festo illo die tanto gaudio affecit, quanto L. Quid est igitur, cur ita semper deum appellet Epicurus beatum et aeternum?
Quid, cum volumus nomina eorum, qui quid gesserint, nota nobis esse, parentes, patriam, multa praeterea minime necessaria? Sed ad bona praeterita redeamus. Quid enim de amicitia statueris utilitatis causa expetenda vides. Dicet pro me ipsa virtus nec dubitabit isti vestro beato M. Ut scias me intellegere, primum idem esse dico voluptatem, quod ille don. Immo alio genere; Familiares nostros, credo, Sironem dicis et Philodemum, cum optimos viros, tum homines doctissimos. Negat esse eam, inquit, propter se expetendam.
Opportunity Costs are difficult to calculate, especially when they relate to non-financial considerations. Focusing on Opportunity Costs might also a risk of ‘analysis paralysis’ arising from fear of making the incorrect choice. Finally, assessing Opportunity Costsaccurately is not always practical for every decision, all the time.
Even ‘saving’ has a cost.
Saving money in a bank account with a defined interest rate has an opportunity cost of the lost returns from an alternative venture that you might have invested in.
Benjamin Franklin: ‘Time is money’.
Franklin coined the term ‘time is money’ which can be viewed as another example of opportunity cost. In 1974 he wrote “Remember that Time is Money. He that can earn Ten Shillings a Day by his Labour, and goes abroad, or sits idle one half of that Day, tho’ he spends but Sixpence during his Diversion or Idleness, ought not to reckon That the only Expense; he has really spent or rather thrown away Five Shillings besides.”
What about dinner?
If you are considering buying pizza or asian food for dinner tonight, then finally decide on pizza. The opportunity cost is the asian food that you did not choose.
Opportunity cost is a key mental model in decision making, economics and creating efficiencies.
Use the following examples of connected and complementary models to weave opportunity cost into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above.
Connected models:
- Sunk cost fallacy: when considering past decisions and ‘cutting losses’ moving forward.
- Cost-benefit analysis: in deciding on a course of action.
- BATNA: in considering the best alternative.
- Second order thinking: considering the implications beyond the immediate.
- A/B testing: to weigh up potential opportunity costs.
- Regret minimisation framework: a decision process that imagines the long term opportunity cost of inaction.
- TANSTAAFL: linked to ‘There ain't no such thing as a free lunch’ mental model
Complementary models:
- Compounding: considering the opportunity cost of small consistent investments over extended periods of time.
- Inversion: considering the cost of doing nothing.
- Blue ocean strategy: considering new areas of exploration rather than highly competitive areas.
Opportunity Costs was first introduced as an economics concept by David L. Green in 1984, in his article: Pain cost and opportunity cost. It appeared in the Quarterly Journal of Economics. Its origin is also linked to TANSTAAFL (There ain’t no such thing as a free lunch) in 19th century America in saloons.
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