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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. Equidem etiam Epicurum, in physicis quidem, Democriteum puto. Ego vero volo in virtute vim esse quam maximam; Duo Reges: constructio interrete. Isto modo ne improbos quidem, si essent boni viri. Nec lapathi suavitatem acupenseri Galloni Laelius anteponebat, sed suavitatem ipsam neglegebat; Quid, cum fictas fabulas, e quibus utilitas nulla elici potest, cum voluptate legimus? Ab his oratores, ab his imperatores ac rerum publicarum principes extiterunt. Facit igitur Lucius noster prudenter, qui audire de summo bono potissimum velit; At modo dixeras nihil in istis rebus esse, quod interesset. Potius inflammat, ut coercendi magis quam dedocendi esse videantur. Dolere malum est: in crucem qui agitur, beatus esse non potest. Piso igitur hoc modo, vir optimus tuique, ut scis, amantissimus. Non pugnem cum homine, cur tantum habeat in natura boni; An hoc usque quaque, aliter in vita? Restinguet citius, si ardentem acceperit. Ergo et avarus erit, sed finite, et adulter, verum habebit modum, et luxuriosus eodem modo. Quod autem principium officii quaerunt, melius quam Pyrrho; Quonam, inquit, modo? Illa videamus, quae a te de amicitia dicta sunt.
- Ask: ‘what else could I be doing with this time/money and what would that give me?’
As ...
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Videsne quam sit magna dissensio? Sunt enim prima elementa naturae, quibus auctis vírtutis quasi germen efficitur. Eam tum adesse, cum dolor omnis absit; Sed ad rem redeamus; Introduci enim virtus nullo modo potest, nisi omnia, quae leget quaeque reiciet, unam referentur ad summam. Ad eas enim res ab Epicuro praecepta dantur.
Non est igitur summum malum dolor. Ego quoque, inquit, didicerim libentius si quid attuleris, quam te reprehenderim. Nihil ad rem! Ne sit sane; Vide, quantum, inquam, fallare, Torquate. Teneo, inquit, finem illi videri nihil dolere. Dic in quovis conventu te omnia facere, ne doleas. Vos autem cum perspicuis dubia debeatis illustrare, dubiis perspicua conamini tollere. Quare hoc videndum est, possitne nobis hoc ratio philosophorum dare.
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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