Opportunity Cost: The Mental Model That Helps You Make Smarter Life and Investment Decisions
- personal995
- Apr 12
- 5 min read
Updated: Apr 15
What if you could think like Warren Buffett or Benjamin Franklin in your everyday life? Opportunity cost is one of the mental models that helps you do so. Guiding smarter decisions with your time, money, and energy.
By learning to see the hidden trade-offs behind every decision, you can dramatically increase the return on investment (ROI) of your everyday choices.
What's in this article?
What Is Opportunity Cost?
Opportunity cost is the value of the next-best option you give up every time you choose something else—whether it’s time, money, or a missed experience.
It’s not just about money—it’s also your time, energy, focus, and potential. Every “yes” is also a silent “no” to something else you could be doing, earning, or becoming.
Some History on Opportunity Cost
The earliest conscious usage of opportunity cost stems from early economic thinking, appearing in the writings of thinkers like Adam Smith and David Ricardo in the 18th and 19th centuries.
While they didn’t use the exact term, their work laid the groundwork for the idea—particularly Ricardo’s theory of comparative advantage, which showed how nations could benefit from trade by focusing on what they gave up the least to produce. The similar term alternative cost (similar to opportunity cost) was later coined by Friedrich von Wieser, a member of the Austrian School of Economics, in the early 20th century.
Since then, it has become a cornerstone of economic reasoning. Whether it’s a farmer choosing between planting wheat or corn, or a country deciding how to allocate its budget, the logic is the same: every choice comes with a hidden cost—the value of the next best thing you didn’t choose.
It is here we come to the heart of the matter. The economic principle of comparative advantage', 'a country may, in return for manufactured commodities, import corn even if it can be grown with less labour than in the country from which it is imported. David Ricardo (On the Principles of Political Economy and Taxation.)
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How Investors Use Opportunity Cost to Optimise Their Decisions
Legendary investors like Warren Buffett apply the concept of opportunity cost rigorously through a method called discounted cash flow (DCF) analysis. At its core, DCF is a way to estimate the value of a business by calculating the present value of all the cash it’s expected to generate in the future—and then comparing that return to the return you’d get by simply leaving your money in a relatively safe alternative, like a government bond or bank account.
If the investment doesn’t clearly outperform that safe alternative, it’s not worth doing. In other words, great investors like Buffett doesn't just ask, “Is this business good?”— they ask, “Is it better than my next best option?” This is pure opportunity cost thinking in action. It’s not about making good choices—it’s about making the best possible choice from the options available, based on what you’re giving up. That’s how top investors, and the most effective people in general, make consistently better decisions over time.
I call investing the greatest business in the world… because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it. Warren Buffett (On the Principles of Political Economy and Taxation.)
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Opportunity Cost Historical Example
Benjamin Franklin: Early Opportunity Cost Decisions
When Benjamin Franklin was a young man, he loved to read—but books were expensive. One day, instead of buying a fashionable new coat like his peers, he chose to spend his limited money on a secondhand copy of The Spectator, a British publication filled with essays on philosophy, literature, and morality. His friends laughed, but Franklin knew the book would feed his mind for life. That single decision sparked a lifelong habit of self-education, shaping his thinking and writing. He went on to become a pioneering inventor, diplomat, and one of the chief architects of modern democracy—largely because he learned to prioritise his investment decisions.
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How to Use Opportunity Cost to Improve Your Everyday Decisions
Tip 1. Time Is Your Scarcest and Most Valuable Asset
Saying yes to one thing is always saying no to something else.
Most people undervalue their time by default. Every hour you spend is a non-refundable investment—and the opportunity cost is what you could have done instead to move closer to your goals, strengthen relationships, or improve your health.
Ask yourself before any commitment: “What am I giving up to do this?” That question alone can protect your calendar, your focus, and your peace of mind.
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Tip 2. Beware the Cost of Sticking With ‘Good Enough’
The enemy of great is not bad—it’s good enough.
Whether it’s staying in a job that pays okay, maintaining surface-level friendships, or investing in a project with mediocre potential, not changing has a cost. The cost is missing out on something better—an opportunity you don’t pursue because you’re stuck in something that’s just fine.
Regularly reassess your major life commitments—career, location, relationships. Ask: “If I didn’t already have this, would I actively choose it again today?”
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Tip 3. Money Left Sitting Still Loses Power
Every dollar you spend—or don’t invest—is a vote for what matters less.
When you leave money idle or spend impulsively, you’re not just parting with cash—you’re giving up the compounding value it could have created. This applies to both investing and spending habits. That $1,000 could grow to $10,000 over time—or it could disappear on something forgettable.
Train yourself to always ask: “What’s the opportunity cost of this purchase or investment?” This mindset gradually shifts your financial decisions toward long-term, high-return choices.
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To Summarise
By learning to think in terms of opportunity cost—like Warren Buffett, Benjamin Franklin, and the great economic minds of history—you gain the ability to make smarter, clearer, and more intentional decisions about how you spend your time, energy, and money.
What would your life look like if you consistently chose the best option available, not just the familiar or easy one?
“Dost thou love life? Then do not squander time, for that is the stuff life is made of.”
Benjamin Franklin (The Way to Wealth: Ben Franklin on Money and Success)
Member's Related Links & Readings:
Next Steps Guides:
Goals (Direction)
Focus (Potential)
Investing (Finance)
Planning (Create & Build)
Execution (Create & Build)
Astuteness (Autonomy)
Judgement (Wisdom)
The Wealth of Nations by Adam Smith (Book Review: Library: Finance & Investing)
The Snowball: Warren Buffett and the Business of Life by Alice Schroeder (Book Review: Library: Biography)
Poor Richard’s Almanack by Benjamin Franklin (Book Review: Library: Decision Making)
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All the best. Take care of yourself and each other.
