Second-Order Thinking: Making better decisions

Making good decisions is incredibly complicated. Indeed, we need to develop a good process for making decisions, spend time analyzing the facts of a decision, and actually commit to a course of action. There is one step of the decision-making process people often forget, however: considering the consequences of outcomes.

Let’s say you want to get healthier. The easiest thing to do would be to say “I will start my new routine tomorrow” and go on with your day. The other option would be to go to the gym today and start your new health routine today. The first option is obviously a bad option — we are not going to the gym right now — but there are other consequences often forget about. For example, if you can delay your routine until tomorrow, what is stopping you from delaying it again when tomorrow comes? You have set a bad precedent. This is a prime example of second-order thinking.

What is second-order thinking?

The term second-order thinking was developed by investor Howard Marks in his book The Most Important Thing:

“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.”

First-order thinking is the easiest type of decision. When we are hungry, we go eat a chocolate bar because we know it is tasty and it will solve the problem immediately. However, when we only think about first-order consequences, we miss out on a lot of the potential outcomes of a decision. Sure, eating a chocolate bar will not make us hungry anymore. But it is a temporary solution, and we may eat another one when we get hungry again. And over time, we will become less healthy because of the amount of chocolate we have consumed. These are the second-order consequences, and are hidden unless you think about them.

Second-order thinking takes more time and care. Second-order thinking is all about asking the question “And then what?” after you make a decision. You need to consider the consequences of doing something, and then the potential ramifications of those consequences. If you eat the chocolate bar, you are less likely to eat something healthy when you want a snack the next time. Second-order thinking requires us to be more logical and analytical, whereas first-order thinking is often impulsive.

Why is second-order thinking so important? Everyone knows to think about the immediate consequences of doing something. They can easily tell that eating a chocolate bar will make them feel guilty. But if you know to think about the second-order of events — the consequences of those consequences — then you can get ahead. Because so few people do it, there is an arbitrage opportunity available. You are looking at something from a different perspective than most other people.

Second-order thinking also helps us think about our own biases. When we think about first-order consequences, our internal biases can often become hidden because we are focused on immediate gratification. However, when we take a step back to think about the bigger picture — the second- and third-order consequences — we are more likely to take those biases into account when making our decisions.

How can we think in the second-order?

Howard Marks mentions a few questions you can ask yourself in order to train your mind to think about second-order and third-order consequences. I have edited some of these questions for brevity and clarity.

- What is the range of likely future outcomes?

- What outcome do I think shall occur?

- What is the probability I am right?

- What does the general consensus think?

- How, if at all, does my expectation differ from the consensus?

You can also utilize the 10-10-10 rule to think about second-order consequences. This model is particularly useful when you are making personal decisions where a consensus cannot exist. The 10-10-10 rule states you should ask these questions:

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

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

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

This is similar to Bezos’ “regret minimization framework”, where you are encouraged to think about a decision in the long-term and consider whether you would regret pursuing — or not pursuing — a certain course of action.

You can also use the lateral thinking mental model to help you consider the second-order consequences of a decision. This model states we should think about “what can be” rather than “what is”. This means we should think about what circumstances could arise, which will encourage our model to think outside of the box and consider different outcomes down the road after making a decision.

Finally, you can create a second-order consequence matrix to help you visualize what other consequences may be a result of your decision. This matrix can be especially useful when you are making a big decision that requires careful contemplation. The second-order consequence matrix looks like the image below, where you will think your decision through and write down what consequences may arise, and in what order.

Second-order thinking.png

Second-order thinking is complicated. It can take a long time to adjust your mind to thinking about the second-order consequences of your decisions — the things that happen after a decision, and the things that happen after that. That said, second-order thinking is a great way to level-up your decision-making abilities, and take a more deliberate approach to making decisions.