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Story time: Cobra Effect – British Colonial Rule in India – Importance of Second Order thinking – Compounding effects of poverty
Drastically improve your decision making by asking a simple question, ‘and, then what?’
Thread…
Drastically improve your decision making by asking a simple question, ‘and, then what?’
Thread…
This is a true story that dates back more than a century ago.
It was the time of Colonial British empire in India. Location was capital of India, Delhi. Region was infested with one of the deadliest and venomous snake species, cobra.
It was the time of Colonial British empire in India. Location was capital of India, Delhi. Region was infested with one of the deadliest and venomous snake species, cobra.
Locals probably were well adjusted to co-living with such deadly creature but the colonial empire was rightly worried about such wide presence of this killer and wanted to curb their numbers for the safety of its personnel.
There came an ingenious idea of incentivising locals, who were already adept at knowing their way around this predator, to kill cobras for a monetary reward. And it did work. Locals made money by bringing in dead cobras. It was a win-win situation, or was it?
Over time it was expected that the number of dead cobras will decline, but it kept increasing. Something was not right. Upon investigation Brits learnt that locals had started breeding cobras at home, for additional income on the side.
After learning how the scheme had spectacularly backfired, empire immediately scrapped it. All the cobras in the breeder program, that were now rendered useless, were set free by locals. And the empire ended up with increased population of Cobras compared to when they started
This incident came to be known as Cobra Effect: https://en.wikipedia.org/wiki/Cobra_effect
There are many lessons to learn here about incentives, human nature, decision/policy making. The most important being the mental model used by many successful people called ‘Second Order Thinking’
There are many lessons to learn here about incentives, human nature, decision/policy making. The most important being the mental model used by many successful people called ‘Second Order Thinking’
First order thinking deals with immediate effects of the action. It is easier, more tangible. Second order or higher order thinking deals with what comes after. One needs to ask themselves ‘and, then what?’ and also think through time.
Using complex financial products like CDS & CDOs, helped financial institutions transfer the risk and make profits as a first order impact. But, left unchecked the higher order impact was subprime crisis – 2008. Having no skin in the game, institutions ignored second order effect
Biggest impact that lack of second order thinking creates in all our daily lives is ‘Compounding Effect of Poverty’. We fail to consider total cost of ownership (TCO) in many of our purchase decisions and end up paying more for a sub-par solution.
Owing financial constraints, we often make decisions based on immediate price without considering TCO. Buying cheaper appliances, paying more for maintenance & electricity. Ignoring little tooth-ache, paying for root canal. Poor decision making keeps you poor
On the other hand, second order thinking can open up the opportunities where first order effects are slightly negative but higher order effects are positive. Trade short term pain for long term benefits. E.g. Compromising social life in short term to create passive income stream
Second Order Thinking is not easy it takes a lot of efforts, thinking from multiple aspects, thinking through time, and understanding things on deeper level. But, all it takes to start on that track is asking yourself ‘And, then what?’
