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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. Sed in rebus apertissimis nimium longi sumus. Nec enim, dum metuit, iustus est, et certe, si metuere destiterit, non erit; Respondent extrema primis, media utrisque, omnia omnibus. Duo Reges: constructio interrete. Negare non possum. Contemnit enim disserendi elegantiam, confuse loquitur. Cum autem in quo sapienter dicimus, id a primo rectissime dicitur. Quia nec honesto quic quam honestius nec turpi turpius. Venit ad extremum; Non enim solum Torquatus dixit quid sentiret, sed etiam cur. Dic in quovis conventu te omnia facere, ne doleas. Non modo carum sibi quemque, verum etiam vehementer carum esse? Dempta enim aeternitate nihilo beatior Iuppiter quam Epicurus; Quid ergo hoc loco intellegit honestum? Ne amores quidem sanctos a sapiente alienos esse arbitrantur. Huic mori optimum esse propter desperationem sapientiae, illi propter spem vivere. Tu autem negas fortem esse quemquam posse, qui dolorem malum putet. Itaque hoc frequenter dici solet a vobis, non intellegere nos, quam dicat Epicurus voluptatem. Nam, ut paulo ante docui, augendae voluptatis finis est doloris omnis amotio.
- 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. Non modo carum sibi quemque, verum etiam vehementer carum esse? Neque solum ea communia, verum etiam paria esse dixerunt. Nobis aliter videtur, recte secusne, postea; Tu vero, inquam, ducas licet, si sequetur; Utrum igitur tibi litteram videor an totas paginas commovere? Duo Reges: constructio interrete. Sed quid attinet de rebus tam apertis plura requirere? Utinam quidem dicerent alium alio beatiorem! Iam ruinas videres.
Ut enim consuetudo loquitur, id solum dicitur honestum, quod est populari fama gloriosum. Nec vero alia sunt quaerenda contra Carneadeam illam sententiam. Minime vero probatur huic disciplinae, de qua loquor, aut iustitiam aut amicitiam propter utilitates adscisci aut probari. Mihi vero, inquit, placet agi subtilius et, ut ipse dixisti, pressius.
Cum id fugiunt, re eadem defendunt, quae Peripatetici, verba. Honesta oratio, Socratica, Platonis etiam. Qua tu etiam inprudens utebare non numquam. Proclivi currit oratio. Sine ea igitur iucunde negat posse se vivere? Illa videamus, quae a te de amicitia dicta sunt. Quamquam te quidem video minime esse deterritum. Utrum igitur tibi litteram videor an totas paginas commovere?
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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