Second Order Thinking: This is How to Make Better Decisions

It was a record that stood for 37 years. But then in 1998, both Mark McGwire of the St Louis Cardinals and Sammy Sosa of the Chicago Cubs broke Roger Maris’s Major League baseball home run record of 61 home runs in a season. McGwire ended up with 70 home runs and Sosa ended up with 66. Both were passed 3 years later by Barry Bonds who hit 73.

Unfortunately, the accomplishments of all three were tarnished due to the use and allegation of performance-enhancing drugs to gain an advantage over their competitors. Both Bonds and McGwire have admitted to taking steroids, while Sosa has been linked to using steroids in George Mitchell’s investigation into steroid and growth hormone use in Major League Baseball.

I wonder if these players have used steroids had they used second order thinking?

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 favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.” ¹

In other words, first level thinking is looking at the immediate impact of whatever decision we make. Whereas second order thinking is looking at all of the potential consequences of whatever decision we make.

While Marks applies it to the world of investing, we can apply it to many areas of our lives.

The Problem with Ignoring Second Order Consequences

By focusing primarily on the immediate impact of our decisions, we are ignoring potentially harmful consequences down the road from second and subsequent order consequences.

As billionaire and hedge fund manager Ray Dalio says in his book Principles: Life and Work:

“This is because first-order consequences often have opposite desirabilities from second-order consequences, resulting in big mistakes in decision making.” ²

A couple of quick examples:

Deciding whether to exercise

If you consider only the first order consequence, which is that going to the gym and exercising can end up being a little painful, you may not go.

But, if you use second order thinking and consider the second order consequence, which is that you will feel better, look better, and have more energy, you will likely hit the gym.

Notice how the consequences between the first and second order are opposite from each other.

Should I order pizza?

A second example that many of us can relate to is losing weight.

You are at a restaurant and need to decide whether you should order the pizza that looks so good or the healthier salad. If you consider only the first order consequence, which is that it will taste good, you will order the pizza.

But, if you use second order thinking and consider the second order consequence, which is that it is unhealthy and you will just keep getting fatter, you will likely order the salad instead.

Again, notice how the consequences between the first and second order are opposite from each other.

Why Else is Second Order Thinking is So Important?

We have just seen two examples that show how utilizing second order thinking can help us avoid potential harmful consequences down the road.

Another important reason to use second order thinking is to avoid mediocrity.

Think about it like this, if we think the same way everyone else thinks how can we expect to outperform them?

As Marks says:

“Unconventionality shouldn’t be a goal in itself, but rather a way of thinking. In order to distinguish yourself from others, it helps to have ideas that are different and to process those ideas differently.”

He offers an interesting matrix that shows potential results you can achieve by thinking or acting unconventionally using second order thinking:

 

	Conventional Behavior	Unconventional Behavior
Favorable Outcomes	Average good results	Above-average results
Unfavorable Outcomes	Average bad results	Below average results

Source: The Most Important Thing Illuminated, by Howard Marks

The key point is this – if you think like every other first order thinker out there, you are going to think about the same things they are, and you will end up reaching similar conclusions and similar results.

However, if you think like a second order thinker, you are going to think about different things than they are, which may result in your reaching different conclusions and different results.

One Caveat…It Isn’t Easy…

The main difference in utilizing second order thinking versus first order thinking is the workload. 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.

How Can We Use It? – Use It or Lose It

There are several ways we can make second order thinking actionable in our lives:

Howard Marks suggests some questions we can ask when making decisions:

  What is the range of likely future outcomes?
  Which outcome do I think will occur?
  What is the probability I’m right?
  What does the consensus think?
  How does my expectation differ from the consensus?

Utilize the 10 10 10 Rule

Which was made famous by Suzie Welch that we discussed in a previous blog post.

The idea is to take whatever decision you need to make, and then ask yourself 3 questions:

(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?

Use Lateral Thinking

One of Edward De Bono’s tools that we also discussed in a previous post, involves using a set of techniques that can move us away from being concerned with “what is” (vertical thinking) to “what can be” (horizontal or lateral thinking) which results in creativity and generating new ideas.

How Could the Baseball Players in the Introduction Have Used Second Order Thinking?

Let’s take a look at what first order thinking, and second order thinking may look like to the baseball players we discussed earlier.

First order thinking: Taking performance-enhancing drugs will help me add more muscle. This may give me added ‘oomph’ to turn balls that were long pop flies into home runs. This will improve my statistics this year which will result in a more lucrative contract and potential endorsement deals.

Second order thinking:  There are many potential consequences of my taking performance-enhancing drugs. I will know in my heart that I did not achieve the results on my own. And if I get caught, I may get suspended or banished from baseball altogether. This could lead to other financial and reputational consequences, not to mention the fact it could impact my getting into the Hall of Fame. Then there are the potential health issues I may face later in life…

That being said, they would have still had a decision to make and who knows what they would have done? However, by using second order thinking it would have at least made them think long and hard about the consequences of their actions.

Speaking of Flies!

Not pop flies but those of the insect variety…

The other day I was sitting outside and was being pestered by a fly.

My first order thought was, “damn I wish there were no flies!”

But then I did a little second order thinking and asked myself this question, “what if there were no flies?”

Then I thought about it – many other animals rely on flies as their food source, so there’s no telling what effect that would have on our ecosystem.

Not only that, according to entomologist Bryan Lessard, without flies we would have no chocolate as “the only known pollinator of the flower of the cocoa plant is a teeny-tiny midge fly from the family Ceratopogonidae” ³

I suppose it is a bug’s life after all!

Until next time, keep using second order thinking…and as always…PYMFP!
–Rick

Use It or Lose It

Here are a few ways to use second order thinking:

(1)  Use the questions that Howard Marks suggests:

  What is the range of likely future outcomes?
  Which outcome do I think will occur?
  What is the probability I’m right?
  What does the consensus think?
  How does my expectation differ from the consensus?

(2)  Utilize the 10 10 10 rule.

(3)  Use lateral thinking.

When to Use It:

To either understand the consequences of actions from your decisions or to avoid mediocrity and being average by thinking differently.

What Do You Think?

Are you someone who is prone to first order thinking? Or do you use second order and subsequent order thinking in your life? Do you have any examples? Please share your thoughts in the comments below!

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References

http://www.americaslibrary.gov/jb/modern/jb_modern_maris_1.html

¹ The Most Important Thing Illuminated,

² Principles: Life and Work

³ https://ideas.ted.com/lets-appreciate-the-humble-fly/