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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. Nam cui proposito sit conservatio sui, necesse est huic partes quoque sui caras suo genere laudabiles. Restincta enim sitis stabilitatem voluptatis habet, inquit, illa autem voluptas ipsius restinctionis in motu est. Cum id fugiunt, re eadem defendunt, quae Peripatetici, verba. Ergo et avarus erit, sed finite, et adulter, verum habebit modum, et luxuriosus eodem modo. Quae est igitur causa istarum angustiarum? Ait enim se, si uratur, Quam hoc suave! dicturum. Duo Reges: constructio interrete. Utinam quidem dicerent alium alio beatiorem! Iam ruinas videres. De illis, cum volemus. Magni enim aestimabat pecuniam non modo non contra leges, sed etiam legibus partam. Igitur neque stultorum quisquam beatus neque sapientium non beatus. Varietates autem iniurasque fortunae facile veteres philosophorum praeceptis instituta vita superabat. Solum praeterea formosum, solum liberum, solum civem, stultost; Mihi quidem Antiochum, quem audis, satis belle videris attendere. Nos quidem Virtutes sic natae sumus, ut tibi serviremus, aliud negotii nihil habemus. Quasi ego id curem, quid ille aiat aut neget. Saepe ab Aristotele, a Theophrasto mirabiliter est laudata per se ipsa rerum scientia; Effluit igitur voluptas corporis et prima quaeque avolat saepiusque relinquit causam paenitendi quam recordandi. Sin eam, quam Hieronymus, ne fecisset idem, ut voluptatem illam Aristippi in prima commendatione poneret. Quid ergo aliud intellegetur nisi uti ne quae pars naturae neglegatur? Immo istud quidem, inquam, quo loco quidque, nisi iniquum postulo, arbitratu meo. Compensabatur, inquit, cum summis doloribus laetitia. Quid, cum fictas fabulas, e quibus utilitas nulla elici potest, cum voluptate legimus? Nec mihi illud dixeris: Haec enim ipsa mihi sunt voluptati, et erant illa Torquatis. Cur iustitia laudatur? Sic enim censent, oportunitatis esse beate vivere. Nec lapathi suavitatem acupenseri Galloni Laelius anteponebat, sed suavitatem ipsam neglegebat;
- 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. Cur haec eadem Democritus? Quid ergo aliud intellegetur nisi uti ne quae pars naturae neglegatur? Bork Sed tu istuc dixti bene Latine, parum plane. Qui autem de summo bono dissentit de tota philosophiae ratione dissentit. Consequens enim est et post oritur, ut dixi.
Egone quaeris, inquit, quid sentiam? Duo Reges: constructio interrete. Primum quid tu dicis breve? Nec lapathi suavitatem acupenseri Galloni Laelius anteponebat, sed suavitatem ipsam neglegebat; Et certamen honestum et disputatio splendida! omnis est enim de virtutis dignitate contentio. Nam illud quidem adduci vix possum, ut ea, quae senserit ille, tibi non vera videantur. Quae sequuntur igitur? Post enim Chrysippum eum non sane est disputatum.
Videamus animi partes, quarum est conspectus illustrior; Traditur, inquit, ab Epicuro ratio neglegendi doloris. Consequens enim est et post oritur, ut dixi. Quare conare, quaeso. Quorum sine causa fieri nihil putandum est. Varietates autem iniurasque fortunae facile veteres philosophorum praeceptis instituta vita superabat. Quae quidem sapientes sequuntur duce natura tamquam videntes; Ut id aliis narrare gestiant? Cum ageremus, inquit, vitae beatum et eundem supremum diem, scribebamus haec. Audeo dicere, inquit. Mihi enim satis est, ipsis non satis. An dubium est, quin virtus ita maximam partem optineat in rebus humanis, ut reliquas obruat?
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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