Second-Order Thinking for Better Decisions
The process of thinking seems like a task for the subconscious or a reflex. It just happens. Our hearts beat to pump blood throughout our body without our direction. We shiver uncontrollably when our body temperature drops. Our eyes blink 15–20 times per minute to lubricate our eyeballs and keep debris at bay.
Thinking often occurs in a similar vein as our mind wanders effortlessly. I liken this to first-order thinking. Howard Marks, the famed investor, wrote about first and second-order thinking in his book “The Most Important Thing: Uncommon Sense for the Thoughtful Investor,” but the ideas are far-reaching.
First-order thinking is what most people engage in most of the time. Marks described it as “simplistic and superficial,” noting that “just about everyone can do it.” It’s not that first-order thinking is wrong or inferior. Life is full of situations that require us to make decisions on limited information and time constraints. When faced with problems that require immediate solutions, we cannot think beyond the first order. For example, if a car pulls out in front of you in an intersection, there’s no time to consider every available option. You have to take immediate action and rely on instincts and first-order thinking to keep you out of harm's way.
Another instance when you wouldn't think beyond the first order is when making mundane, low-impact decisions. After waking up in the morning, you probably don’t spend too much time choosing your outfit. You aren’t going to analyze every wardrobe combination to determine which one looks best. That would be a waste of time and energy, and the stakes are usually low.
In contrast, second-order thinking is complex and requires significantly more effort. Marks compared them by saying, “the difference in workload between first-level and second-level thinking is clearly massive, and the number of people capable of the latter is tiny compared to the number capable of the former.” Thus, second-order thinking is helpful when solving complex problems, and making impactful policy, business, or personal decisions with long-term consequences.
What is second-order thinking?
Let’s examine robotics in manufacturing as an example. When contemplating the implications of robots on the job market, it’s natural to conclude that robots will replace human workers, leading to higher unemployment. That initial conclusion is first-order thinking. However, if we explore this topic more deeply, we could conclude that robots will make manufacturing more efficient and increase profits, thus enabling massive economic growth. Economic growth will result in budding new industries, which require a robust workforce. Therefore, more robots in manufacturing could ultimately lower unemployment. For more information on the future of automation, I recommend reading Ark-Invest’s white paper.
How do we think beyond the first order?
Examine multiple outcomes — don’t stop after you reach your initial conclusion. Or even your second. Continue thinking about the possibilities, even if they seem unlikely at first. Occasionally, as we uncover more information, an outcome once deemed unlikely suddenly looks probable.
Keep asking, “what happens then.” — I remember hearing the term “blowback” during political debates about US foreign policy actions in the Middle East. Blowback is an unintended consequence. When thinking critically, continuously ask, “what happens then.” Repeatedly questioning the future reveals potential secondary and tertiary effects. As we saw with some of those very foreign policy decisions, the first-order decisions led to outcomes for which officials hadn’t prepared.
Consider the long-term effects — second-order thinking is powerful because it considers non-immediate results. Some actions have positive short-term results but damaging, long-lasting long-term consequences. The first-order thinker is more likely to make decisions that are only beneficial in the short term. Contrarily, one who thinks beyond the first order can make decisions based on long-term outcomes, even when they don't satisfy short-sighted onlookers.
Benefits of Thinking Beyond the First Order
Better decisions —if you want to make better personal or business decisions, you must consider the second and third-order consequences. 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.”
Higher-performance — by practicing deep thinking, you are likely already ahead of your peers. As mentioned earlier, second-order thinking takes a lot of work. But if you are making decisions based on the second and third-order, in time, you’ll surpass your peers who are thinking day-to-day or month-to-month.
Phaedrus, the Roman fabulist, wrote, “Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.” I believe the few are those who think beyond the first order. If you want better outcomes, start practicing second-order thinking. Before long, you’ll default to deeper thinking on impactful decisions and achieve favorable results with lasting impacts.
