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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. Septem autem illi non suo, sed populorum suffragio omnium nominati sunt. Nullum inveniri verbum potest quod magis idem declaret Latine, quod Graece, quam declarat voluptas. Quae autem natura suae primae institutionis oblita est? Claudii libidini, qui tum erat summo ne imperio, dederetur. At ego quem huic anteponam non audeo dicere; Indicant pueri, in quibus ut in speculis natura cernitur. Nam si amitti vita beata potest, beata esse non potest. Summum ením bonum exposuit vacuitatem doloris; Invidiosum nomen est, infame, suspectum. Itaque nostrum est-quod nostrum dico, artis est-ad ea principia, quae accepimus. Omnium enim rerum principia parva sunt, sed suis progressionibus usa augentur nec sine causa; Bona autem corporis huic sunt, quod posterius posui, similiora. Avaritiamne minuis? Quod idem cum vestri faciant, non satis magnam tribuunt inventoribus gratiam. Duo Reges: constructio interrete. Quam illa ardentis amores excitaret sui! Cur tandem? Virtutis, magnitudinis animi, patientiae, fortitudinis fomentis dolor mitigari solet. Nam quid possumus facere melius?
- Ask: ‘what else could I be doing with this time/money and what would that give me?’
As ...
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Avaritiamne minuis? Minime id quidem, inquam, alienum, multumque ad ea, quae quaerimus, explicatio tua ista profecerit. Modo etiam paulum ad dexteram de via declinavi, ut ad Pericli sepulcrum accederem. Quid igitur, inquit, eos responsuros putas?
Duo Reges: constructio interrete. Sed id ne cogitari quidem potest quale sit, ut non repugnet ipsum sibi. Atque his de rebus et splendida est eorum et illustris oratio. Sit hoc ultimum bonorum, quod nunc a me defenditur; Cetera illa adhibebat, quibus demptis negat se Epicurus intellegere quid sit bonum. Quem si tenueris, non modo meum Ciceronem, sed etiam me ipsum abducas licebit. Illa sunt similia: hebes acies est cuipiam oculorum, corpore alius senescit;
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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