Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and any eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
In life and in business, it is tempting to prioritize decisions with small upside that provide instant gratification.
This is often referred to as first-order thinking, which is simplistic and superficial by nature.
First-order thinking does not consider the negative ramifications of a decision in the future.
An investor with first-order thinking might believe that a favorable company outlook means its share price will rise.
Similarly, an overweight individual might conclude that the best choice for a hungry stomach is a chocolate bar.
In both cases, the potentially negative future consequences of each choice have not been duly considered.
Ultimately, second-order thinkers perform better than first-order thinkers because they can see solutions to problems that others can’t.
Implementing second-order thinking in practice
Element
Description
Analysis
Implications
Benefits
Challenges
Use Cases
Examples
Concept
Second-Order Thinking involves considering the potential consequences and ripple effects of actions and decisions beyond the immediate or first-order effects.
Evaluating whether individuals are aware of the concept of Second-Order Thinking and its importance.
Understanding the concept is crucial for recognizing the need to think beyond the obvious and consider broader implications.
Awareness of the concept and its significance.
Lack of awareness or consideration of second-order effects.
Decision-making, strategic planning.
Recognizing the importance of Second-Order Thinking in complex situations.
First-Order Effects
First-Order Effects refer to the immediate, direct, and visible outcomes of an action or decision. Second-Order Thinking begins by identifying these initial effects.
Analyzing the identification and assessment of the immediate and observable consequences of an action or decision.
Recognizing first-order effects is the starting point for Second-Order Thinking, allowing individuals to trace the chain of outcomes.
Understanding the initial outcomes and their significance.
Overlooking or underestimating first-order effects.
Initial impact assessment, observation.
Recognizing that a price increase leads to a drop in sales.
Second-Order Effects
The core of Second-Order Thinking involves considering the secondary or indirect effects that result from the initial action or decision. It goes beyond the obvious and delves into unintended or hidden consequences.
Evaluating the depth and breadth of analysis in identifying second-order effects, including potential positive and negative repercussions.
Second-Order Thinking aims to uncover hidden or unexpected consequences that may not be immediately apparent but can be significant.
Greater insight into potential outcomes and consequences.
Difficulty in predicting all second-order effects accurately.
Scenario analysis, risk assessment.
Recognizing that a price increase, while boosting short-term profits, may erode long-term customer loyalty.
Third-Order Effects
In some cases, Second-Order Thinking may extend to third-order effects, which are the consequences resulting from the secondary effects identified in the previous step.
Assessing the depth of analysis and consideration of potential third-order effects, which may have even wider-ranging consequences.
Third-Order Thinking allows for a more comprehensive exploration of the ramifications of actions or decisions.
Comprehensive understanding of potential outcomes.
Challenges in predicting distant or less obvious effects accurately.
Recognizing that a price increase, leading to short-term profits and eroded customer loyalty, may eventually result in market share loss and lower overall profitability.
Here is a basic framework for adopting second-order thinking:
The next time you are faced with a problem or decision, note down the first solution that comes to mind. In other words, the first-order thinking solution.
Then, evaluate the future consequences of the first-order decision to the second, third, and fourth orders. For each respective level of decision making, identify the potential positive and negative outcomes.
In the third step, evaluate the risks of each decision as objectively as possible. How will your decision impact others and what might they think about the decision? Why do you think your decision is right? Is there a simpler solution?
Re-examine second, third, and fourth-order decisions, even if the immediate consequences are negative. This helps identify choices that favor short term pain for long term gain.
Learn to utilize feedback loops to help you make better decisions. In other words, will the decision you make give you accurate and timely feedback on its effectiveness? Here, it’s important to realize that the power of good decision making compounds over time – so continue to rework and refine your processes.
When to Use Second-Order Thinking:
Second-order thinking is a valuable approach in various situations and fields:
1. Investment and Finance:
Use it in financial decision-making to anticipate the long-term effects of investments and market trends.
2. Risk Management:
Apply second-order thinking to assess potential risks and their cascading impact on a project or organization.
3. Strategic Planning:
In strategic planning, consider the second-order effects of different strategies and decisions to choose the most suitable approach.
4. Public Policy:
In policymaking, assess the potential unintended consequences of new regulations and initiatives.
5. Problem Solving:
Use it to identify and address the root causes of complex problems, considering how solutions may impact various aspects of a system.
How to Use Second-Order Thinking:
Applying second-order thinking effectively involves a systematic approach:
1. Identify the Decision:
Start by identifying the decision or action that requires second-order thinking. What are the potential consequences of this decision?
2. Consider the Immediate Effects:
Analyze the immediate and obvious effects of the decision. What will happen in the short term?
3. Delve Deeper:
Go beyond the immediate effects. Ask yourself, “What could be the indirect or longer-term consequences of this decision?”
4. Explore Ripple Effects:
Consider how the decision may set off a chain of events or ripple effects. What are the possible outcomes of these cascading effects?
5. Assess Context:
Examine the broader context in which the decision will occur. How might external factors or changing circumstances influence the consequences?
6. Make an Informed Choice:
Use the insights gained from second-order thinking to make a well-informed decision that takes into account both immediate and long-term effects.
Drawbacks and Limitations of Second-Order Thinking:
While second-order thinking is a valuable cognitive approach, it has certain drawbacks and limitations:
1. Complexity:
It can be mentally demanding and time-consuming, especially for decisions with numerous potential consequences.
2. Uncertainty:
Anticipating all possible second-order effects is challenging, and there may still be unforeseen consequences.
3. Analysis Paralysis:
Overthinking and excessively analyzing every decision can lead to decision paralysis.
4. Context Dependence:
The significance of second-order effects can vary greatly depending on the context, making it challenging to apply universally.
5. Subjectivity:
The interpretation of second-order effects can be subjective and influenced by individual perspectives and biases.
What to Expect from Using Second-Order Thinking:
Using second-order thinking can lead to several outcomes and benefits:
1. Enhanced Decision-Making:
By considering deeper and long-term consequences, decisions are more likely to be well-informed and strategic.
2. Risk Mitigation:
Anticipating potential negative consequences allows for better risk management and mitigation strategies.
3. Improved Problem Solving:
When addressing complex problems, second-order thinking helps identify and tackle underlying causes.
4. Strategic Advantage:
In strategic planning and business, second-order thinking can provide a competitive advantage by anticipating market trends and disruptions.
5. Systemic Understanding:
Second-order thinking fosters a deeper understanding of systems and how various components interact.
Relevance in Various Fields:
Second-order thinking is relevant in a wide range of fields and disciplines, including:
1. Finance and Economics:
In investment analysis, economic modeling, and financial planning, understanding second-order effects is crucial for risk assessment and portfolio management.
2. Public Policy:
Policymakers need to consider the broader societal implications of policy decisions, including their second-order effects.
3. Engineering and Design:
In productdesign and engineering, second-order thinking helps anticipate the consequences of design choices on usability, safety, and performance.
4. Ecology and Environment:
Environmental scientists and conservationists use second-order thinking to predict the ecological impacts of human activities and climate change.
5. Business Strategy:
Business leaders employ second-order thinking to guide strategic decisions, especially in industries undergoing rapid change.
An 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?
Examples of second-order thinking
Environmental Conservation: A first-order thinker may prioritize short-term economic gains over environmental conservation. On the other hand, a second-order thinker would consider the long-term consequences of environmental degradation on ecosystems, human health, and the economy, leading to more sustainable practices.
Financial Investments: First-order thinkers may focus on short-term gains and invest in speculative assets without considering the long-term risks. Second-order thinkers, however, analyze the potential consequences of their investment decisions on their overall financial stability and retirement plans.
Public Policy: First-order thinkers may implement policies that address immediate issues without considering the potential unintended consequences. Second-order thinkers, on the other hand, conduct thorough policy analysis to anticipate the broader impacts on society, the economy, and future generations.
Personal Health: A first-order thinker may choose to indulge in unhealthy habits like excessive junk food consumption without considering the long-term health implications. A second-order thinker would prioritize healthy lifestyle choices and consider the impact of their habits on overall well-being and longevity.
Technology Development: First-order thinkers may focus solely on creating cutting-edge technologies without fully assessing their ethical and societal implications. Second-order thinkers take a more holistic approach, considering the potential consequences of technology on privacy, security, and social dynamics.
Business Strategy: First-order thinkers may pursue short-term profit maximization without considering the long-term sustainability and reputation of the company. Second-order thinkers prioritize building a strong brand, customer loyalty, and ethical practices to ensure long-term success.
Education: A first-order thinker may prioritize rote memorization and standardized testing without considering the development of critical thinking and problem-solving skills. Second-order thinkers advocate for a more comprehensive education system that prepares students for future challenges.
International Relations: First-order thinkers may focus on immediate diplomatic agreements without considering the long-term implications on global stability and cooperation. Second-order thinkers take a more strategic approach, considering the broader impact of international relations on peace and security.
Personal Relationships: A first-order thinker may engage in conflicts without considering the potential consequences on relationships and emotional well-being. Second-order thinkers prioritize effective communication and conflict resolution to maintain healthy relationships.
Environmental Impact of Products: First-order thinkers may produce products without considering their environmental footprint. Second-order thinkers focus on sustainable design, materials, and production processes to minimize the negative impact on the environment.
Infrastructure Development:
First-order thinking: Building a new highway to reduce traffic congestion in a city.
Second-order thinking: Considering that the new highway might lead to increased vehicle use, potentially leading to even more traffic in the long run (a phenomenon known as “induced demand”). Instead, investing in public transportation might provide a more sustainable solution.
Pharmaceuticals:
First-order thinking: Developing a drug to treat a particular ailment and getting it to market quickly.
Second-order thinking: Anticipating potential side effects, long-term impacts on patients, and the possibility of bacterial resistance, thus ensuring rigorous testing and monitoring.
Agriculture:
First-order thinking: Using pesticides to increase crop yield.
Second-order thinking: Realizing that over-reliance on pesticides can lead to soil degradation, health issues for consumers, and harm beneficial insects, leading to a longer-term reduction in crop yield.
Water Conservation:
First-order thinking: Building dams to store water.
Second-order thinking: Understanding that dams might disrupt local ecosystems, displace communities, and potentially lead to downstream water shortages. An alternative might be to promote water-saving technologies and conservation practices.
Corporate Promotions:
First-order thinking: Promoting an employee based on their current job performance.
Second-order thinking: Considering whether the skills that made the employee successful in their current role are the same skills needed for success in the higher role, and how the promotion might affect team dynamics.
Urban Development:
First-order thinking: Building more housing to address a growing population.
Second-order thinking: Considering the strain on infrastructure, public services, and the environment. Instead, focus on sustainable urban planning that takes into account transportation, green spaces, and community needs.
Technology and Privacy:
First-order thinking: Creating a social media platform that’s free to use and collects user data to generate revenue through advertising.
Second-order thinking: Anticipating potential privacy concerns, regulatory scrutiny, and the long-term implications of data breaches. This might lead to stronger data protection measures and a more transparent user agreement.
Health and Fitness:
First-order thinking: Introducing a new fitness regimen to lose weight quickly.
Second-order thinking: Considering the potential for injury, long-term sustainability of the regimen, and how rapid weight loss might affect overall health. Instead, advocating for a balanced approach to fitness and nutrition.
Education System Reforms:
First-order thinking: Introducing standardized tests to improve student performance.
Second-order thinking: Recognizing that over-reliance on standardized tests can lead to teaching to the test, reduced critical thinking, and neglect of subjects not on the test. A holistic approach to education might be more beneficial.
Economic Policies:
First-order thinking: Reducing taxes to stimulate economic growth.
Second-order thinking: Considering the potential impact on government revenues, public services, and income inequality. A more nuanced approach might involve targeted tax breaks or investing in sectors with the highest growth potential.
Key takeaways
Second-order thinking is a mental model that allows individuals to travel beyond their comfort zones and objectively analyze the consequences of future decisions.
Second-order thinking is a creative approach to problem-solving that prepares businesses for all scenarios, leading to greater efficiency.
Second-order thinking is most rigorous when second, third, and fourth-order consequences are analyzed objectively using feedback loops. These loops provide valuable feedback on whether a given solution might be viable.
Key highlights
Second-order thinking is a mental model that involves considering future consequences and all potential outcomes of decisions.
It encourages individuals to think beyond the obvious and superficial solutions provided by first-order thinking.
First-order thinking focuses on instant gratification and ignores the negative ramifications of decisions in the future.
Second-order thinkers perform better because they can see solutions to problems that others may overlook.
To implement second-order thinking, one should evaluate the potential positive and negative outcomes of decisions to the second, third, and fourth orders.
Risks of decisions should be objectively assessed, considering their impact on others and the potential for simpler solutions.
Re-examining decisions, even if they result in short-term pain, can lead to long-term gain.
Feedback loops are essential for continuous improvement and effective decision-making.
An example of second-order thinking in business is considering the consequences of rushed recruitment decisions on employee performance and company resources.
Second-order thinking can be applied to various areas such as environmental conservation, financial investments, public policy, personal health, technology development, and business strategy, among others.
It leads to more sustainable practices, better financial planning, informed public policies, healthier lifestyles, and ethical business practices.
Second-order thinking prepares individuals and businesses for all scenarios and helps them adapt to future challenges.
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.
Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.
The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.
Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.
A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.
Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”
The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.
Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.
Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.
Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
