Second-Order Thinking And Why It Matters In Business

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.

Understanding second-order thinking

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

Here is a basic framework for adopting second-order thinking:

  1. 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.
  2. 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.
  3. 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?
  4. 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.
  5. 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. 

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?

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.

Additional Resources:

Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"