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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. Et quae per vim oblatum stuprum volontaria morte lueret inventa est et qui interficeret filiam, ne stupraretur. Levatio igitur vitiorum magna fit in iis, qui habent ad virtutem progressionis aliquantum. Me igitur ipsum ames oportet, non mea, si veri amici futuri sumus. Duo Reges: constructio interrete. Sed in rebus apertissimis nimium longi sumus. Et quod est munus, quod opus sapientiae? Haec et tu ita posuisti, et verba vestra sunt. Haeret in salebra. Prioris generis est docilitas, memoria; Aliter autem vobis placet. Quod ea non occurrentia fingunt, vincunt Aristonem; Videmusne ut pueri ne verberibus quidem a contemplandis rebus perquirendisque deterreantur? Qui ita affectus, beatum esse numquam probabis; Videsne quam sit magna dissensio? Non est igitur voluptas bonum. Satisne igitur videor vim verborum tenere, an sum etiam nunc vel Graece loqui vel Latine docendus?
- 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. Quis suae urbis conservatorem Codrum, quis Erechthei filias non maxime laudat? Partim cursu et peragratione laetantur, congregatione aliae coetum quodam modo civitatis imitantur; Nihil enim iam habes, quod ad corpus referas; Deque his rebus satis multa in nostris de re publica libris sunt dicta a Laelio.
Quamquam te quidem video minime esse deterritum. Nam si propter voluptatem, quae est ista laus, quae possit e macello peti? Qualem igitur hominem natura inchoavit? De malis autem et bonis ab iis animalibus, quae nondum depravata sint, ait optime iudicari. Parvi enim primo ortu sic iacent, tamquam omnino sine animo sint. Memini vero, inquam; Itaque haec cum illis est dissensio, cum Peripateticis nulla sane. Nam cui proposito sit conservatio sui, necesse est huic partes quoque sui caras suo genere laudabiles.
Duo Reges: constructio interrete. Bonum negas esse divitias, praeposìtum esse dicis? Illud urgueam, non intellegere eum quid sibi dicendum sit, cum dolorem summum malum esse dixerit. Tum Piso: Quoniam igitur aliquid omnes, quid Lucius noster? Ergo id est convenienter naturae vivere, a natura discedere. Ut necesse sit omnium rerum, quae natura vigeant, similem esse finem, non eundem.
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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