Second-Order Thinking

“We can be blind to the obvious, and we are also blind to our blindness.” — Daniel Kahneman

How do you put the checks and guards in place to ensure that you’re making the best decision at the time?

Understanding how to think things through – to push your mind past the first step – can help you solve problems, avoid problems, and take better actions.

Once you start approaching life and the choices you make in this way, you will create a huge momentum shift in your thoughts, actions and decisions, which ultimately will directly affect your income, impact and freedom.

First order of consequences are focused on SHORT-term thinking, whereas the second, third, fourth, fifth, are all long-term benefits, which because of that, have a cost to the first order. - Ray Dalio

Weigh second- and third-order consequences.

Source: https://www.principles.com/principles/060a4d9c-4fd7-491a-bce8-631ec85bf397/

By recognizing the higher-level consequences nature optimizes for, I’ve come to see that

people who overweigh the first-order consequences of their decisions and ignore the effects of second- and subsequent-order consequences rarely reach their goals.

This is because

first-order consequences often have opposite desirabilities from second-order consequences, resulting in big mistakes in decision making.

This is especially true when we are treading in uncharted territories.

For example,

1. the first-order consequences of exercise (pain and time spent) are commonly considered undesirable, while the second-order consequences (better health and more attractive appearance) are desirable.
2. Similarly, food that tastes good is often bad for you and vice versa.

Quite often the first-order consequences are the temptations that cost us what we really want, and sometimes they are the barriers that stand in our way. It’s almost as though nature sorts us by throwing us trick choices that have both types of consequences and penalizing those who make their decisions on the basis of the first-order consequences alone.

By contrast, people who choose what they really want, and avoid the temptations and get over the pains that drive them away from what they really want, are much more likely to have successful lives.

Some more examples

First-Order Consequence	Second-Order Consequence
This food tastes great	It counterproductive to my weight-loss goals
Exercising is painful and takes time	I’m healthier and feel better
These cocktails makes me feel good	You’ve got a hangover
It’s uncomfortable firing someone	The team is more efficient
Reading takes time	You’re more knowledgeable
Procrastinating is easier	You’re stressed about deadline
Take new job because of more money	Less opportunity to develop and grow

First and Second Order Effects

Source: https://the4thdimension.ca/first-and-second-order-effects/

A first order effect is an immediate consequence of an action. And consequences have consequences. A second order effect is the consequence of the consequence of the first action. If you have a series of actions the second order effect of the first action alters the outcome of the second. And the second order effect of the second action alters the outcome of the third action. And so on…. Got it?

Now this is where it gets interesting. The order matters: if you have three proposed actions, and can choose the order, the order you choose matters. The consequence of each action is different and interacts with the next action in a complex manner. Choosing one action instead of another results in a different first, second order effect which impacts the second action differently and so on….

There are three different types of “levels” for consequences:

1. First-order: the most immediate feelings or results of a decision
2. Second-order: the longer-term effect of the decision
3. Third-order: the significant long-term impact of the decision and eventual outcome

First-order Thinking

First-order thinking is superficial at best, fast and easy, reactionary, and obvious. Our System 1 can handle them well. It is what causes SHORT-term thinking, “in-the-now satisfaction”, “instant gratification”, with no consideration for the consequences of actions. It massively hinders our growth in many aspects of life, professionally and personally.

It happens when we look for something that only solves the immediate problem without considering the consequences.

With our obsession with self, preoccupation with our selfish needs and our self-centered attitudes, putting our names at the top of our amends or forgiveness lists is not a good idea.

As seen in Daniel Kahneman’s book “Thinking Fast and Slow”, first-order thinking is intuitive and fast, which may lead to us having many blind spots within our cognition. These blind spots are significant because it ignores judging probabilities and understanding statistical trends, which may result in negative consequences for everyday thinking.

It’s often easier to identify when people don’t adequately consider the second and subsequent-order impacts. For example, consider a country that, wanting to inspire regime change in another country, funds and provides weapons to a group of “moderate rebels.” Only it turns out that those moderate rebels will become powerful and then go to war with the sponsoring country for decades. Whoops.

The road to out-thinking people can’t come from first-order thinking. It must come from second-order thinking. Extraordinary performance comes from seeing things that other people can’t see. -Shane Parrish

Second-Order Thinking

Using second-order thinking as a mental model means understanding and analyzing the implications of the first-order consequences.

Second-order thinking involves slowing the process down and takes into account factors like time and effect. It emphasizes the concept of compounding. By mapping out the non-visible, it encourages us to think outside the box and understand the cascading effects of our actions.

This is what smart people use to outperform other people.

Think about how your decisions will influence your future decisions instead of immediate ones. Think things through. Examine the long-term consequences of decisions. This is called second-order thinking.

Think of it as - nature's way of balancing things out. Nature optimises for the whole, not for the individual. But most people judge good and bad based only on how it affects them.

Our realizations about various things is not obvious. We can reach good conclusions only when we separate our feelings, and begin to dig deeper. When we put your System 2 to work.

The ability to think through problems to the second, third, and nth order—or what we will call second-order thinking for short—is a powerful thinking tool that not only solves problems but avoids them.

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

In his book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor, Howard Marks explains the concept of second-order thinking, which he calls second-level thinking.

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 favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.

Second-order thinking is more deliberate. It is thinking in terms of interactions and time, understanding that despite our intentions our interventions often cause harm. Second order thinkers ask themselves the question “And then what?” This means thinking about the consequences of repeatedly eating a chocolate bar when you are hungry and using that to inform your decision. If you do this you’re more likely to eat something healthy.

Second-order thinking takes a lot of work. It’s not easy to think in terms of systems, interactions, and time. However, doing so is a smart way to separate yourself from the masses.

And it’s incredibly difficult.

The first-order consequence does not have to be positive: short-term pain leads to long-term gain.

1. Psychology
2. Fallacies

Put it into practice and improve your ability to think

Hunt for things that are first-order negative, and second- or third-order positive. They are painful, and doesn’t give any immediate returns. That is why a lot of people avoid doing them. But just because things look like they have no immediate payoff, doesn’t mean that’s the case. All it means is that you’ll have less competition if the second and third order consequences are positive because everyone who thinks at the first order won’t think things through. But they have profound second- and third-order returns. Reading books, going to the gym, avoiding junk food, thinking in second- and third-order, etc., are all good examples. Focus on them.

The good news? All of this is in our direct control. We have all the power to choose which level consequence we’re optimizing for in our own lives.

To make getting started easy, think of one decision you might be making now that’s based on a first-order consequence that should instead be based on second-order.

Here are some ways to put second-order thinking into practice today.

You want to understand the immediate and second-order consequences before you make the decision.

1. The key question in uncovering second-order consequences is, And then what?
2. From there, mapping out the potential consequences and impacts of the different decisions through time benchmarks, similar to the probabilistic thinking’s framework:
   1. Current = first-order consequences
   2. Near-term = second-order consequences
   3. Long-term = third-order consequences
   4. Think across time - What do the consequences look like in 10 minutes? 10 months? 10 Years?
3. Out-of-the-box thinking
   1. This involves system 2 thinking (terminology defined by Kahneman’s book) that is deliberate and logical. It involves potentially collaborating with various decision-makers to really understand the potential impact of the decision made in the future, as its consequences are dynamic, complex, and uncertain.
4. Create templates with 1st, 2nd, and 3rd order consequences. Identify your decision, think it through, and write down the consequences. If you review these regularly you’ll be able to help calibrate your thinking.
5. Practice First principles thinking to
   1. reduce uncertainty
   2. learn more about the decision and identify the risks associated that may impact others/the broader ecosystem. Ask yourself how important parts of the ecosystem are likely to respond.
      1. How are various people involved going to get affected by this?
      2. How will employees deal with this?
      3. What will my competitors likely do?
      4. What about my suppliers?
      5. What about the regulators?
      6. How does your new growth hack affect your support executives, your logistics, or even your competitors?
      7. What is the impact of the outcome? Is it incremental or will it cause a ripple effect across the organization?
      8. What would it do to our brand and company reputation?
      9. How will it impact our customers and their existing behaviour?
      10. Will there be impacts on our site performance? How about our data or codebase?
      11. Are there any other potential risks that we’re not noticing?