second-order-thinking

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.

Connected Business Concepts

Heuristics

heuristic
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.

Bounded Rationality

bounded-rationality
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.

Second-Order Thinking

second-order-thinking
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

lateral-thinking
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.

Moonshot Thinking

moonshot-thinking
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.

Biases

biases
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.

Dunning-Kruger Effect

dunning-kruger-effect
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

occams-razor
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.

Mandela Effect

mandela-effect
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.

Crowding-Out Effect

crowding-out-effect
The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

bandwagon-effect
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 is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

Read Next: Heuristics, Biases.

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