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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. Quod autem magnum dolorem brevem, longinquum levem esse dicitis, id non intellego quale sit. Vitae autem degendae ratio maxime quidem illis placuit quieta. Id Sextilius factum negabat. Quod autem satis est, eo quicquid accessit, nimium est; Quid autem habent admirationis, cum prope accesseris? Cum ageremus, inquit, vitae beatum et eundem supremum diem, scribebamus haec. Itaque his sapiens semper vacabit. Duo Reges: constructio interrete. Aliter homines, aliter philosophos loqui putas oportere? Quae cum praeponunt, ut sit aliqua rerum selectio, naturam videntur sequi; Aut haec tibi, Torquate, sunt vituperanda aut patrocinium voluptatis repudiandum. Summus dolor plures dies manere non potest? Ergo illi intellegunt quid Epicurus dicat, ego non intellego? Cur igitur, inquam, res tam dissimiles eodem nomine appellas? Cur, nisi quod turpis oratio est? Ea possunt paria non esse. Et ille ridens: Video, inquit, quid agas; Atqui iste locus est, Piso, tibi etiam atque etiam confirmandus, inquam; Qui autem de summo bono dissentit de tota philosophiae ratione dissentit. Alterum significari idem, ut si diceretur, officia media omnia aut pleraque servantem vivere. An tu me de L. Iis igitur est difficilius satis facere, qui se Latina scripta dicunt contemnere. Ita relinquet duas, de quibus etiam atque etiam consideret.
- Ask: ‘what else could I be doing with this time/money and what would that give me?’
As ...
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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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