Different levels of thinking that can lead to better decision making.
Howard Marks, a successful American investor, wrote a book in 2011 called The Most Important Thing that is part memoir, part business analyses, and part interesting takeaways. One of those takeaways is his concept of “first and second-level thinking”. It is the framework by which to make good business decisions. First, second and there is even a third order thinking that are now commonly used to analyze decision-making depth, complexity, and long-term consequences. Their use has broadened to include psychology, systems thinking and strategic planning.
From https://fs.blog/second-order-thinking/
Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.
Ray Dalio
First-order thinking focuses on one’s immediate reactions and feelings about a decision, without thinking about any consequences. We make a quick, intuitive decision without looking ahead at any future impacts that might result. It is fast and easy and what most of us do, most of the time.
Second-order thinking takes into account the longer-term secondary effects and consequences of a decision. We think beyond initial benefits by considering second order multiple hidden consequences to help make better decisions for the long run. We consider how our decisions will influence our future, and our future decisions, instead of only the immediate result. It is more deliberate and anticipatory than first order thinking and involves thinking beyond our initial reaction. It is proactive rather than reactive.
Third-order thinking considers the significant longer-term impact of the decision. I think for everyday use, it is first order and second order that are the most useful.
Two examples –
- If you are very hungry and in a hurry, you might decide to grab a chocolate bar. That is first order thinking.
Second order thinking is to consider any consequences. If the chocolate bar is replacing a meal, it might bring on a stomachache or not completely satisfy the hunger.
Third order thinking will consider how often you replace a meal with a chocolate bar, and the impact that might have long term on your health, weight, and sugar levels.
- You’re about to make an investment. You’re young and the market is crashing. Do you choose stocks, bonds, cash or a mix?
First order thinking says, “Save! All in Cash! Bonds at the worst. Stay away from stocks.”
Second order thinking says, “People are scared, and these stocks are a bargain now. They’re undervalued, and I’m young. I can absorb the risk. Let’s go all in to stocks.”
Example from Neil Kakkar https://neilkakkar.com/second-order-thinking.html
I think this is a useful framework to follow for almost every decision we make, big and small. Many people have difficulty making decisions and this system is a good way to expand the process to include future consequences in the analysis.
Thinking Fast and Thinking Slow by Nobel Prize winner Daniel Kahneman is a slightly different approach than Howard Marks, yet very similar to the issue of how humans make decisions. Both Marks and Kahneman argue that real value and better decisions emerge from slower, more reflective thought processes that consider broader consequences.
