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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. Num quid tale Democritus? Commoda autem et incommoda in eo genere sunt, quae praeposita et reiecta diximus; Laboro autem non sine causa; Quae autem natura suae primae institutionis oblita est? Rhetorice igitur, inquam, nos mavis quam dialectice disputare? Duo Reges: constructio interrete. Hanc quoque iucunditatem, si vis, transfer in animum; Traditur, inquit, ab Epicuro ratio neglegendi doloris. Age nunc isti doceant, vel tu potius quis enim ista melius? Qualem igitur hominem natura inchoavit? Ab his oratores, ab his imperatores ac rerum publicarum principes extiterunt. Comprehensum, quod cognitum non habet? Modo etiam paulum ad dexteram de via declinavi, ut ad Pericli sepulcrum accederem.
- 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. Universa enim illorum ratione cum tota vestra confligendum puto. At quicum ioca seria, ut dicitur, quicum arcana, quicum occulta omnia? Tum, Quintus et Pomponius cum idem se velle dixissent, Piso exorsus est. Ut nemo dubitet, eorum omnia officia quo spectare, quid sequi, quid fugere debeant? Saepe ab Aristotele, a Theophrasto mirabiliter est laudata per se ipsa rerum scientia; Quid igitur dubitamus in tota eius natura quaerere quid sit effectum? Duo Reges: constructio interrete.
Tuum credibile? Non minor, inquit, voluptas percipitur ex vilissimis rebus quam ex pretiosissimis. Quare obscurentur etiam haec, quae secundum naturam esse dicimus, in vita beata; An vero, inquit, quisquam potest probare, quod perceptfum, quod. Torquatus, is qui consul cum Cn. Nam quid possumus facere melius?
Itaque mihi non satis videmini considerare quod iter sit naturae quaeque progressio. Quamquam id quidem, infinitum est in hac urbe; Expectoque quid ad id, quod quaerebam, respondeas. Sed ad haec, nisi molestum est, habeo quae velim. An vero, inquit, quisquam potest probare, quod perceptfum, quod. Quae cum essent dicta, discessimus. Quis negat? Introduci enim virtus nullo modo potest, nisi omnia, quae leget quaeque reiciet, unam referentur ad summam. Quid dubitas igitur mutare principia naturae? O magnam vim ingenii causamque iustam, cur nova existeret disciplina! Perge porro.
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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