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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. Est igitur officium eius generis, quod nec in bonis ponatur nec in contrariis. Itaque ad tempus ad Pisonem omnes. Hoc mihi cum tuo fratre convenit. Quo plebiscito decreta a senatu est consuli quaestio Cn. Sed non alienum est, quo facilius vis verbi intellegatur, rationem huius verbi faciendi Zenonis exponere. Etenim semper illud extra est, quod arte comprehenditur. Duo Reges: constructio interrete. Eorum enim est haec querela, qui sibi cari sunt seseque diligunt. At iste non dolendi status non vocatur voluptas. Apud ceteros autem philosophos, qui quaesivit aliquid, tacet; In his igitur partibus duabus nihil erat, quod Zeno commutare gestiret. Quem Tiberina descensio festo illo die tanto gaudio affecit, quanto L. Indicant pueri, in quibus ut in speculis natura cernitur. Ex quo, id quod omnes expetunt, beate vivendi ratio inveniri et comparari potest. Nihil sane. In qua si nihil est praeter rationem, sit in una virtute finis bonorum; Cur haec eadem Democritus? Hoc sic expositum dissimile est superiori. Non igitur de improbo, sed de callido improbo quaerimus, qualis Q. Memini me adesse P.
- 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. Quid ergo aliud intellegetur nisi uti ne quae pars naturae neglegatur? Quod autem ratione actum est, id officium appellamus. Non enim, si omnia non sequebatur, idcirco non erat ortus illinc. Aliter homines, aliter philosophos loqui putas oportere? Quid enim de amicitia statueris utilitatis causa expetenda vides. In qua si nihil est praeter rationem, sit in una virtute finis bonorum; Minime vero, inquit ille, consentit. Duo Reges: constructio interrete.
Certe nihil nisi quod possit ipsum propter se iure laudari. Tuo vero id quidem, inquam, arbitratu.
Sed utrum hortandus es nobis, Luci, inquit, an etiam tua sponte propensus es? Illa sunt similia: hebes acies est cuipiam oculorum, corpore alius senescit; Negat enim summo bono afferre incrementum diem. Non autem hoc: igitur ne illud quidem. Ita enim vivunt quidam, ut eorum vita refellatur oratio. Fatebuntur Stoici haec omnia dicta esse praeclare, neque eam causam Zenoni desciscendi fuisse. Si enim ad populum me vocas, eum. Et quidem illud ipsum non nimium probo et tantum patior, philosophum loqui de cupiditatibus finiendis. Id enim natura desiderat. Neminem videbis ita laudatum, ut artifex callidus comparandarum voluptatum diceretur. Sed tamen intellego quid velit. Itaque in rebus minime obscuris non multus est apud eos disserendi labor.
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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