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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. Nulla profecto est, quin suam vim retineat a primo ad extremum. Si mala non sunt, iacet omnis ratio Peripateticorum. Paulum, cum regem Persem captum adduceret, eodem flumine invectio? Suo enim quisque studio maxime ducitur. Duo Reges: constructio interrete. Immo videri fortasse. Quod dicit Epicurus etiam de voluptate, quae minime sint voluptates, eas obscurari saepe et obrui. Bork Quicquid enim a sapientia proficiscitur, id continuo debet expletum esse omnibus suis partibus; Ut nemo dubitet, eorum omnia officia quo spectare, quid sequi, quid fugere debeant? Hoc est dicere: Non reprehenderem asotos, si non essent asoti. Habes, inquam, Cato, formam eorum, de quibus loquor, philosophorum. Sic enim censent, oportunitatis esse beate vivere. Dat enim intervalla et relaxat. Invidiosum nomen est, infame, suspectum. Quando enim Socrates, qui parens philosophiae iure dici potest, quicquam tale fecit? At modo dixeras nihil in istis rebus esse, quod interesset. Quare obscurentur etiam haec, quae secundum naturam esse dicimus, in vita beata; Videamus animi partes, quarum est conspectus illustrior; Non dolere, inquam, istud quam vim habeat postea videro; Tum ille: Ain tandem?
- 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. Nam ista vestra: Si gravis, brevis; Duo Reges: constructio interrete. Quodcumque in mentem incideret, et quodcumque tamquam occurreret. Sed vos squalidius, illorum vides quam niteat oratio. Qui non moveatur et offensione turpitudinis et comprobatione honestatis? Beatum, inquit. Quid nunc honeste dicit? Est autem etiam actio quaedam corporis, quae motus et status naturae congruentis tenet; Bona autem corporis huic sunt, quod posterius posui, similiora.
Tum ille timide vel potius verecunde: Facio, inquit. Piso igitur hoc modo, vir optimus tuique, ut scis, amantissimus. Atque ab his initiis profecti omnium virtutum et originem et progressionem persecuti sunt. Quo modo autem philosophus loquitur? Multa sunt dicta ab antiquis de contemnendis ac despiciendis rebus humanis; Et quidem iure fortasse, sed tamen non gravissimum est testimonium multitudinis. Hoc enim constituto in philosophia constituta sunt omnia. Iam in altera philosophiae parte. Praeterea sublata cognitione et scientia tollitur omnis ratio et vitae degendae et rerum gerendarum. Huius ego nunc auctoritatem sequens idem faciam.
Esse enim quam vellet iniquus iustus poterat inpune. Dat enim intervalla et relaxat. Tollitur beneficium, tollitur gratia, quae sunt vincla concordiae. Aliter enim nosmet ipsos nosse non possumus. Quo plebiscito decreta a senatu est consuli quaestio Cn. Non igitur bene. Equidem etiam Epicurum, in physicis quidem, Democriteum puto. Deinde disputat, quod cuiusque generis animantium statui deceat extremum.
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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