Second Order Thinking

MM03 - The Leadership Vision

What is Second Order Thinking?

Second-order thinking is a concept discussed by investor Howard Marks in his book The Most Important Thing Illuminated, he calls it "second-level thinking" and distinguishes it from "first-level thinking" by saying:

"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in "The outlook for the company is favourable, meaning the stock will go up." Second-level thinking is deep, complex and convoluted." 

Second-order thinking is our ability to think past the immediate consequences of a given decision. This is also known as Higher-order thinking, futuristic thinking, leadership thinking or out of the box thinking. It requires solving problems in a manner that avoids unintentional and unforeseen outcomes.

Second-order thinking is a necessity to think beyond what we know, things we haven't thought about by applying divergent information and forming new associations and connections.

Let's start with inside the box thinking or first-order thinking, it is comfortable and driven by our past experiences. It is activated by system1 thinking which is intuitive and fast (Source: Thinking Fast And Slow by Daniel Kahneman). The first-order thinking becomes dangerous when it is aligned to our bias because then it blocks our ability to identify threats beyond level 1.

Second-order thinking is hard and looks beyond our current assumptions and beliefs. It requires massive effort to dig out the potential impact of our decisions way into the future. It involves system2 thinking which is deliberate and logical.

Why use Second Order Thinking?

The biggest reason to utilise second-order thinking is to avoid the mistake that can set you on an incorrect path. Always remember that it is challenging to learn new thing, but much more challenging if you have to unlearn before learning.

Referencing law 29 from the book, “48 Laws of Power”, by Robert Greene he states “Plan all the way to the end.” Quoting from the book “The ending is everything. Plan all the way to it, taking into account all the possible consequences, obstacles, and twists of fortune that might reverse your hard work and give the glory to others. By planning to the end you will not be overwhelmed by circumstances and you will know when to stop. Gently guide fortune and help determine the future by thinking far ahead.”

In Another book “The 33 Strategies of War”, by Robert Greene he says, Lose battles but win the war: grand strategy – Grand strategy is the art of looking beyond the battle and calculating ahead. It requires that you focus on your ultimate goal and plot to reach it. Let others get caught up in the twists and turns of the battle, relishing their little victories. Grand strategy will bring you the ultimate reward: the last laugh

Grand strategy has 4 main pillars – Focus on your greater goal, your destiny; widen your perspective (see things for what they are, not for how you wish them to be); sever the roots (what motivates the enemy, what is the source of their power); take the indirect route to your goal

One more Book “The Laws of Human Nature”, by Robert Greene describes, the law of shortsightedness , “Your eyes should be on larger trend that govern events, on that which is not immediately available. Never lose sight of your long term goal.”

All these books talk about thinking and planning for the long term, which is the most incredible tool a leader should have in his box. Moreover, the billionaire hedge fund manager and philanthropist Ray Dalio said,

“Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.”

—Ray Dalio

How to use Second Order Thinking?

Second-order thinking as a mental model requires going out of our comfort zone to think outside this box. It requires analysing the potential impact of our decision into the future. It requires asking these questions:

  • Always ask a follow on question to your first order thinking; like “and then what?“ or “what next?“

  • How can I make decisions with positive outcomes compounded in the future?

  • What can be the potential downside of this decision and its effect later?

  • What is the probability of me being right or wrong?

  • Create a first-order solution, then find its consequence, then find second-order consequence, then find third-order consequence and so on…

  • Utilise 10 10 10 rule i.e.

    1. How will I feel about it 10 minutes from now?

    2. How will I feel about it 10 months from now?

    3. How will I feel about it 10 years from now?

If you hit a dead-end using second-order thinking, go back to your drawing board and simplify your first-order solution using Occam’s razor

When to use Second Order Thinking?

The second-order thinking should be used in conjunction with any other mental model to validate our solution against the alignment for long term goals.

This also helps us to carve out the right solution to our current problem and avoid a band-aid approach. If water is leaking from the pipe and you need 24x7 high-pressure water supply on tap, the resolution is not to increase the water pressure and cover for the leak but to get the pipe fixed.

The only caveat is, The workload for second-order thinking is much greater, which is why many people don’t go any further than first-order thinking. It requires not only more time, but it requires a lot of deep and complex thought while taking many factors into account.

Where to use Second Order Thinking?

The first level is the problem and solution domain. The second level is the incentive and value domain.

All the crucial decisions in life or business should be made under second-order thinking such as career plan, family plan, investment plan, retirement plan, business growth plan, marketing plan etc.

Who should use Second Order Thinking?

“We can not solve our problems with the same level of thinking that created them” ― Albert Einstein

All individuals aiming to create an impact in everything they do or deliver should always consider implementing second-order thinking.

Example of Second Order Thinking

One of the most practical second-order thinking strategies is the coffee can investing. “Coffee Can Investing Portfolio” is a term coined by Robert G. Kirby who is considered as one of the most outstanding investment advisors of all times. The concept of “Coffee Can Investing Portfolio” has its roots in Old West America where people used to hide their valuables in the coffee cans and then the cans were put under a mattress to be kept for years or even decades. They should identify such invaluable companies and invest for at least 10 years. Coffee Can Investing strategy neither works on value nor growth; it works on quality investing.

Other examples include;

Shall I go for a run?

First order response: No, it will be tiring and time waste.

Second order response: It will be tiring now but healthier for future.

Another example - from the Psychology of Human Misjudgment.

FedEx faced a peculiar problem. They wanted to deliver packages on time. For this, they needed to load their airplanes before sunrise. The catch - they were never on time. The night shift workers were paid by the hour, and expected to work the entire 8 hour night shift. The idea was, if they spend enough time on the shift, they’ll get the job done. (As some managers still think - in places with fixed work hours)

Finally, somebody got the idea that it was foolish to pay the night shift by the hour. The employer wanted rapid loading of a plane, not maximised billable hours of employee service. Maybe if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.

Food for thought

If a leader/manager is always making a decision based on first-order thinking, i.e. making statements like, “this is a problem for future and not to be considered now”, then do you even have a right leader?

Recommended book

The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor