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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. Portenta haec esse dicit, neque ea ratione ullo modo posse vivi; Et quidem illud ipsum non nimium probo et tantum patior, philosophum loqui de cupiditatibus finiendis. An dubium est, quin virtus ita maximam partem optineat in rebus humanis, ut reliquas obruat? Et nemo nimium beatus est; Duo Reges: constructio interrete. Tollitur beneficium, tollitur gratia, quae sunt vincla concordiae. Callipho ad virtutem nihil adiunxit nisi voluptatem, Diodorus vacuitatem doloris. At enim hic etiam dolore. Cur tantas regiones barbarorum pedibus obiit, tot maria transmisit? Sed audiamus ipsum: Compensabatur, inquit, tamen cum his omnibus animi laetitia, quam capiebam memoria rationum inventorumque nostrorum. Quasi ego id curem, quid ille aiat aut neget. Ita relinquet duas, de quibus etiam atque etiam consideret. Videamus animi partes, quarum est conspectus illustrior; Quid enim est a Chrysippo praetermissum in Stoicis? Paulum, cum regem Persem captum adduceret, eodem flumine invectio? Videsne, ut haec concinant? Ut in voluptate sit, qui epuletur, in dolore, qui torqueatur.
- 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. In qua quid est boni praeter summam voluptatem, et eam sempiternam? Quae cum praeponunt, ut sit aliqua rerum selectio, naturam videntur sequi; Quid iudicant sensus? Nunc haec primum fortasse audientis servire debemus. Duo Reges: constructio interrete. Collige omnia, quae soletis: Praesidium amicorum. Ab his oratores, ab his imperatores ac rerum publicarum principes extiterunt. Nemo igitur esse beatus potest.
Sed tamen omne, quod de re bona dilucide dicitur, mihi praeclare dici videtur. Eam stabilem appellas. Dicet pro me ipsa virtus nec dubitabit isti vestro beato M. Qualem igitur hominem natura inchoavit? Quaesita enim virtus est, non quae relinqueret naturam, sed quae tueretur. Cupiditates non Epicuri divisione finiebat, sed sua satietate.
Sed est forma eius disciplinae, sicut fere ceterarum, triplex: una pars est naturae, disserendi altera, vivendi tertia. Nihilo beatiorem esse Metellum quam Regulum. Honesta oratio, Socratica, Platonis etiam. Deinde disputat, quod cuiusque generis animantium statui deceat extremum. Haec quo modo conveniant, non sane intellego. An me, inquis, tam amentem putas, ut apud imperitos isto modo loquar? Primum divisit ineleganter; Graecum enim hunc versum nostis omnes-: Suavis laborum est praeteritorum memoria. Etsi qui potest intellegi aut cogitari esse aliquod animal, quod se oderit?
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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