Second-Order Thinking 101

We live in a world of complex systems that punish simple, linear thinking. The greatest minds consistently use second-order thinking to solve problems.

But what is "second-order thinking" and how does it work?

Here's Second-Order Thinking 101!

1/ First, a few definitions.

First-order thinking focuses exclusively on solving an immediate problem, without regard for any potential consequences.

To paraphrase the words of the great @HowardMarksBook, it is "simplistic and superficial, and just about everyone can do it."

2/ Second-order thinking moves beyond the immediate problem and considers the multiple layers of implications and consequences of a given decision.

In short, it looks past the simple first-order effects of a decision and deeply examines the second, third, and Nth-order effects.

3/ But what does that really mean?

A simple analogy is of a rock being thrown into a lake.

The rock is your decision or action. It disturbs the calm and creates an impact.

The first impact (or splash) is the first-order effect. But it doesn't stop there, it spreads outwards.

4/ The chain of subsequent events (or ripples) are the second, third, and Nth-order effects.

When you make a decision or take action, it is critical to consider those ripples, not just the initial splash.

Failing to do so may lead to unintended consequences and new problems.

5/ Second-order thinking is a mental tool that forces you to consider the unconsidered.

It is a superpower that we all have within us - it just requires intentionality.

Let's look at a few examples of where this might come into play and how you can implement it in your life.

6/ In policymaking?

If you want an example of the dangers of first-order thinking, read my thread below on the Cobra Effect.

Problem: too many cobras.
Solution: offer a bounty for cobras.
Initial Outcome: fewer cobras.
Ultimate Outcome: more cobras! https://twitter.com/SahilBloom/status/1318926201772101632?s=20

7/ Policymakers tend to be poor second-level thinkers.

Some would suggest it is a function of the time horizons of re-election.

Or perhaps it is the lack of "skin in the game" as it relates to the second, third, and N-th order effects of their actions (h/t @nntaleb).

8/ One salient example: corporate bailouts.

The first-order thinker may say bailouts are good - they save jobs (for now), maintain service, etc.

But the second-order thinker looks further - what impact does a government backstop have on future executive risk appetite?

9/ Another example: money printing and extraordinary Fed intervention.

The first-order thinker may say this is good - it prevents economic suffering.

But the second-order thinker looks further - what distributional impacts does this have on society? https://twitter.com/SahilBloom/status/1309145743756865536?s=20

10/ The second-order thinker takes time to examine beyond the positive first-order effects to evaluate the action in the context of all of the later effects.

To quote @ShaneAParrish, they diligently ask, "And then what?" https://twitter.com/ShaneAParrish/status/1323257399776550912?s=20

11/ The examples used are not intended as indictments of these solutions.

These are complex issues.

The point is, when dealing with complex issues, you have to adopt second-order thinking in order to increase the probability of a good outcome.

12/ Second-order thinking is like a cheat code for life.

The best business operators are said to think five moves ahead - that is second-order thinking at work.

The best investors are said to think on a more powerful level - that is second-order thinking at work.

13/ So how do you become a second-order thinker?

The @ShaneAParrish "and then what?" method is a great start.

From there, keep asking questions. Drill down deeper. Go down the rabbit hole!

As @HowardMarksBook wrote, "Second-level thinking is deep, complex, and convoluted."

14/ Becoming a second-order thinker will provide you with asymmetric opportunities for success. It is critical to achieving non-linear outcomes.

Why? It is hard to do, so very few people will do it.

Think on a higher level. The air is thinner up there.

15/ So that was Second-Order Thinking 101. For more, I highly recommend the below resources.

Second-Order Thinking by @FarnamStreet: https://fs.blog/2016/04/second-order-thinking/

Memo by @HowardMarksBook: https://www.oaktreecapital.com/docs/default-source/memos/2015-09-09-its-not-easy.pdf?sfvrsn=47bb0f65_2

The Most Important Thing by @HowardMarksBook: https://www.amazon.com/gp/product/0231162847/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0231162847&linkCode=as2&tag=sbloomadvisor-20&linkId=7e097174651b10b271fe423418ab7b4a

16/ For more educational threads on business, money, finance, and economics, check out my meta-thread below.

This topic leads nicely into future threads on externalities, systems thinking, and more. Turn on post notifications so you don't miss out! https://twitter.com/SahilBloom/status/1284583099775324161?s=20