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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. Sed vos squalidius, illorum vides quam niteat oratio. Eodem modo is enim tibi nemo dabit, quod, expetendum sit, id esse laudabile. Itaque hic ipse iam pridem est reiectus; Quid autem habent admirationis, cum prope accesseris? Quae si potest singula consolando levare, universa quo modo sustinebit? Duo Reges: constructio interrete. An hoc usque quaque, aliter in vita? Erit enim mecum, si tecum erit. Illa argumenta propria videamus, cur omnia sint paria peccata. Non est igitur voluptas bonum. Huic mori optimum esse propter desperationem sapientiae, illi propter spem vivere. Quis istum dolorem timet? At ille pellit, qui permulcet sensum voluptate. Aliud igitur esse censet gaudere, aliud non dolere. Verum tamen cum de rebus grandioribus dicas, ipsae res verba rapiunt; Haec bene dicuntur, nec ego repugno, sed inter sese ipsa pugnant. Si de re disceptari oportet, nulla mihi tecum, Cato, potest esse dissensio. At enim hic etiam dolore. Multoque hoc melius nos veriusque quam Stoici. Itaque ab his ordiamur.
- Ask: ‘what else could I be doing with this time/money and what would that give me?’
As ...
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Quid, quod homines infima fortuna, nulla spe rerum gerendarum, opifices denique delectantur historia? Perturbationes autem nulla naturae vi commoventur, omniaque ea sunt opiniones ac iudicia levitatis. Ex eorum enim scriptis et institutis cum omnis doctrina liberalis, omnis historia. Res enim concurrent contrariae. Quid enim mihi potest esse optatius quam cum Catone, omnium virtutum auctore, de virtutibus disputare? Et quidem, inquit, vehementer errat;
Aliud igitur esse censet gaudere, aliud non dolere. Est igitur officium eius generis, quod nec in bonis ponatur nec in contrariis. Nam de isto magna dissensio est. Qui ita affectus, beatum esse numquam probabis; Primum divisit ineleganter; Varietates autem iniurasque fortunae facile veteres philosophorum praeceptis instituta vita superabat. Cum id fugiunt, re eadem defendunt, quae Peripatetici, verba. Animi enim quoque dolores percipiet omnibus partibus maiores quam corporis. Mihi, inquam, qui te id ipsum rogavi?
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.
My Notes
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