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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 de summo mox, ut dixi, videbimus et ad id explicandum disputationem omnem conferemus. Quos nisi redarguimus, omnis virtus, omne decus, omnis vera laus deserenda est. Nam, ut sint illa vendibiliora, haec uberiora certe sunt. An hoc usque quaque, aliter in vita? Nec vero alia sunt quaerenda contra Carneadeam illam sententiam. An dubium est, quin virtus ita maximam partem optineat in rebus humanis, ut reliquas obruat? Duo Reges: constructio interrete. Traditur, inquit, ab Epicuro ratio neglegendi doloris. Ad corpus diceres pertinere-, sed ea, quae dixi, ad corpusne refers? Sed quanta sit alias, nunc tantum possitne esse tanta. Perturbationes autem nulla naturae vi commoventur, omniaque ea sunt opiniones ac iudicia levitatis. Sit enim idem caecus, debilis. Ut enim consuetudo loquitur, id solum dicitur honestum, quod est populari fama gloriosum. Plane idem, inquit, et maxima quidem, qua fieri nulla maior potest. Cum audissem Antiochum, Brute, ut solebam, cum M. Quasi ego id curem, quid ille aiat aut neget. At ego quem huic anteponam non audeo dicere; Quo modo autem optimum, si bonum praeterea nullum est? Deinde prima illa, quae in congressu solemus: Quid tu, inquit, huc? Est igitur officium eius generis, quod nec in bonis ponatur nec in contrariis. Ergo opifex plus sibi proponet ad formarum quam civis excellens ad factorum pulchritudinem? Quarum ambarum rerum cum medicinam pollicetur, luxuriae licentiam pollicetur. Nec enim, omnes avaritias si aeque avaritias esse dixerimus, sequetur ut etiam aequas esse dicamus. Etsi qui potest intellegi aut cogitari esse aliquod animal, quod se oderit? Qui non moveatur et offensione turpitudinis et comprobatione honestatis? Sit enim idem caecus, debilis.
- 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. Audax negotium, dicerem impudens, nisi hoc institutum postea translatum ad philosophos nostros esset. Quare hoc videndum est, possitne nobis hoc ratio philosophorum dare. Duo Reges: constructio interrete.
Inde sermone vario sex illa a Dipylo stadia confecimus. Atque haec coniunctio confusioque virtutum tamen a philosophis ratione quadam distinguitur. Ubi ut eam caperet aut quando? Mihi quidem Antiochum, quem audis, satis belle videris attendere. Verba tu fingas et ea dicas, quae non sentias?
Ita enim vivunt quidam, ut eorum vita refellatur oratio. Non enim solum Torquatus dixit quid sentiret, sed etiam cur. Nam quibus rebus efficiuntur voluptates, eae non sunt in potestate sapientis. Sed quid attinet de rebus tam apertis plura requirere? Ergo, si semel tristior effectus est, hilara vita amissa est? Cum sciret confestim esse moriendum eamque mortem ardentiore studio peteret, quam Epicurus voluptatem petendam putat. Aliter enim explicari, quod quaeritur, non potest. Si quae forte-possumus.
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.
My Notes
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