Save to My Latticework unsave

Opportunity Cost
Opportunity Cost
Opportunity Cost
save0 saved view8.4K views
Share this with your network
Share this with your network
Overview

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. Ecce aliud simile dissimile. Sic consequentibus vestris sublatis prima tolluntur.

Quo modo autem philosophus loquitur? A quibus propter discendi cupiditatem videmus ultimas terras esse peragratas. Aeque enim contingit omnibus fidibus, ut incontentae sint. Duo Reges: constructio interrete.

Utram tandem linguam nescio? Quod non subducta utilitatis ratione effici solet, sed ipsum a se oritur et sua sponte nascitur. Quia nec honesto quic quam honestius nec turpi turpius. Tum Piso: Atqui, Cicero, inquit, ista studia, si ad imitandos summos viros spectant, ingeniosorum sunt; Immo videri fortasse. Summum a vobis bonum voluptas dicitur. Quae fere omnia appellantur uno ingenii nomine, easque virtutes qui habent, ingeniosi vocantur. Est autem etiam actio quaedam corporis, quae motus et status naturae congruentis tenet;

Share this model with your network to be smarter, faster, together!
Actionable Takeaways
  • 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. Hic ambiguo ludimur. Eam tum adesse, cum dolor omnis absit; Quia nec honesto quic quam honestius nec turpi turpius. Ut proverbia non nulla veriora sint quam vestra dogmata. Ad eas enim res ab Epicuro praecepta dantur. Age nunc isti doceant, vel tu potius quis enim ista melius? Duo Reges: constructio interrete. Hoc non est positum in nostra actione. An ea, quae per vinitorem antea consequebatur, per se ipsa curabit? Immo istud quidem, inquam, quo loco quidque, nisi iniquum postulo, arbitratu meo.

Tenent mordicus. Negat esse eam, inquit, propter se expetendam. Huic mori optimum esse propter desperationem sapientiae, illi propter spem vivere. Quis est tam dissimile homini. Quid est, quod ab ea absolvi et perfici debeat? Non laboro, inquit, de nomine. Quid ergo attinet dicere: Nihil haberem, quod reprehenderem, si finitas cupiditates haberent? Quae cum dixisset paulumque institisset, Quid est? Vide igitur ne non debeas verbis nostris uti, sententiis tuis.

Nam quibus rebus efficiuntur voluptates, eae non sunt in potestate sapientis. Ostendit pedes et pectus. In his igitur partibus duabus nihil erat, quod Zeno commutare gestiret. Nemo nostrum istius generis asotos iucunde putat vivere. Quam ob rem tandem, inquit, non satisfacit? Sine ea igitur iucunde negat posse se vivere? Qua tu etiam inprudens utebare non numquam.

Limitations

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.

In Practice

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.

Build your latticework
This model will help you to:

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.
Origins & Resources

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

    Nothing here yet. Join ModelThinkers and login to be the first to comment.
Already a ModelThinkers member? Please log in here.

Oops, That’s Members’ Only!

Fortunately, it only costs US$5/month to Join ModelThinkers and access everything so that you can rapidly discover, learn, and apply the world’s most powerful ideas.

ModelThinkers membership at a glance:

Small mark
UNLOCK EVERYTHING
Access all mental models and premium content.
Small mark
BUILD YOUR LATTICEWORK
Save models to your personal list.
Small mark
QUICKLY MEMORISE MODELS
Use our Learn function to embed models to memory
Small mark
PERSONALISE MODELS
Add your own notes and reminders.
Small mark
BUILD YOUR ‘EXTERNAL BRAIN’
Discover a new idea? Capture it by adding a new model.
Small mark
JOIN THE MT COMMUNITY
Rate models, comment and access exclusive events.

“Yeah, we hate pop ups too. But we wanted to let you know that, with ModelThinkers, we’re making it easier for you to adapt, innovate and create value. We hope you’ll join us and the growing community of ModelThinkers today.”

Arun Pradhan & Shai Desai
CoFounders, ModelThinkers.

You Might Also Like:

- Actionable summaries of the world's most powerful ideas.