Second Order Thinking

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

• How can I make decisions with positive outcomes compounded in the future?
• Is this decision attractive only because it has an immediate effect (first order consequence) positive?
• What can be the potential downside of this decision and its effect later?
• How far can I look to determine how every subsequent decision creates a world of possibilities or limits the outcomes I can achieve?

Second order thinking provides a framework to make decisions by learning the second order consequences of our decisions and analyzing its impact in the near future. Going beyond second level thinking is difficult, but some people learn to expand their thinking to the third level and beyond by asking the same questions at each level.

Why and When to Use Second Order Thinking

Why Use It
Decisions made now have implications for the future. While it’s simpler to think concretely in near-term gains, a poor choice can lead to worse outcomes. Bias plays a role in limiting one’s ability to see clearly, and so an obvious choice can seem that much more enticing. The idea is to push yourself out of your comfort zone, bias, and experiences that shape easily accessible thought patterns.

When to Use It
Don’t choose the first option without exploring the ramifications of your choices. Imagine an unstable state undergoing a regime change, and a superpower delivers arms and resources to a specific group that seems trustworthy. The group comes into power as hoped, but the consequences for those living under the new regime end up being worse than before. In that way, a seemingly good choice early on has catastrophic outcomes long term. Without weighing the negative implications, they choose the path of least resistance and ultimately pay the price. Conversely, many choices in life have negative first-order consequences and subsequently are second-order positive. An excellent long-term choice may not have an immediate payoff. When someone begins lifting weights, the results are not immediate. After investing time and making an effort, they build muscle. In that sense, since many folks get stuck in first-order thinking, there’s less competition the deeper you think.

How to Apply Second Level Thinking
Howard Marks, author and co-founder of asset management firm Oaktree Capital Management, wrote about first and second level thinking (also called first and second order thinking) in his 2011 book, "The Most Important Thing." Marks' focus was making smart investment decisions, but the principles of first and second level thinking can be applied to a range of workplace situations.

First level thinking focuses on solving an immediate problem, with little or no consideration of the potential consequences. In Marks' words, "First level thinking is simplistic and superficial, and just about everyone can do it."

Second level thinking is a deliberate and proactive process and will take some practice to get right.

Let's look at five steps that you can use to develop second level thinking skills:

1. Question Everything: Don't stop once you reach your first solution or conclusion, or even your second. Keep questioning yourself, and ask, "what happens then?" Continue to do so until you have a clear roadmap of potential outcomes. Our articles on Game Theory and "What If" Analysis can help with this process. Equally, it's essential to establish the credibility of information you use when making a decision – what is the evidence for any assertion, who's the source? Critically evaluating information in this way is particularly relevant in the era of fake news . Once you have a comprehensive list of possible outcomes, you can then compare the options.
2. Involve Others: Sometimes you get caught in first level thinking because you simply don't know what other outcomes are possible. But when you bring others into the decision-making process, you'll likely get new perspectives and solutions. These alternative viewpoints could be valuable! It might not be practical, or you might not have the time, to involve others directly. Nevertheless, be sure to consider the likely impact of your decision on other people, teams or departments.
3. Think Long-Term: The power of second level thinking comes from being able to look past the immediate results and consider the impact long term; sometimes a bad outcome now might result in a good outcome in the future. One way to do this is to explore how the decision will play out at different time points. What might the results be in one day? One week? A month, or a year? Ten years? It's important not to assume that conditions will be the same at each of these points. For example, if you are thinking about investing in some new systems for your team, consider how people might be using technology in the future.
4. Don't Discount Options Too Quickly: Keep all your options on the table initially. The purpose of second level thinking is to examine options carefully, from different perspectives. Chances are, your first ideas won't be the best, but sometimes it could be "spot on"!
5. Keep Practicing: For most of us, who probably rely on first level thinking more than we'd care to admit, second level thinking will be a very different approach to problem solving, and will need frequent practice. Aim to apply it to all kinds of decisions to help you to build up the skill. It could be used when assessing everything from what to have for lunch, to whether to sign a new client.

First Order Thinking Vs. Second Order Thinking
In his book The Most Important Thing, Howard Marks describes Second-level thinking in the following way:

First-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.” First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”

In order to achieve results that are above average, for start you will need to master 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. The second-level thinker takes a great many things into account:

• What is the range of likely future outcomes?
• Which outcome do I think will occur?
• What’s the probability I’m right?
• How does my expectation differ from the consensus?
• How does the current price for the asset comport with the consensus view of the future, and with mine?
• Is the consensus psychology that’s incorporated in the price too bullish or bearish?

Example of Second Order Thinking in Business
During recruitment, individuals are often hired because of their ability to fill a vacant position and not on their actual qualifications. Hiring managers who use first-order thinking fill positions because of budget or time constraints and do not objectively assess the credentials of the interviewee.

Second-order thinkers, on the other hand, analyze the consequences of rushing the hiring process. Will the new employee need to be retrained, counseled, or terminated because of poor performance? Will the re-advertising of the position place further pressure on budgetary or time constraints?

See Also

• First Principles Thinking
• Critical Thinking
• Moonshot Thinking