Second-Order Thinking: A Framework Used By The Top 1% To Make Decisions

A mental model is a simple way to understand our complex world and a practical tool to guide our thinking. They are a useful way to change perspective, simplify complexity, and solve problems. We use models to simplify the complex into understandable and organizable chunks.

One of the frameworks widely used by investors, entrepreneurs, and leaders to think, decide, and understand our world is "Second Order/Level Thinking. Billionaire investor Howard Marks explores this concept of thinking, in his excellent book The Most Important Thing.

There are two levels of thinking,

1. First-order thinking: It is simplistic and superficial, and just about everyone can do it. It occurs when we seek a solution that solely addresses the immediate problem without considering the long-term ramifications.

A first-level thinker favors a simple solution over a complex one. Even if the simple solution costs more than the complex in the long run. It's like smoking a cigarette (a simple solution) every time you get stressed while not considering the long-term disadvantages of it.

2. Second-level thinking: It is deep, complex, and considers long-term consequences. Second-level thinkers ask themselves the question “And then what?”. On this level, you are delaying gratification and choosing to go a layer deeper to extract a more appropriate solution.

When you follow second-level thinking, you are more likely to second-guess your decision to smoke a cigarette when you are stressed, consider all the consequences, and then make a more informed decision. You'll always come up with a better solution.

Some steps to apply second-order thinking in your decisions:

1. Consider Immediate Effects: Analyze the immediate consequences of each option. What are the obvious outcomes and the pros and cons in the short term?

2. Identify Second-Order and Anticipate Ripple Effects: Ask yourself, "What happens next?" Consider the indirect or delayed consequences that might result from the initial decision and think about how the decision might impact other areas of your life or other people.

3. Gather Information: Collect relevant information that may help you better understand the potential consequences.

4. Evaluate Risk and Uncertainty: Consider the potential for unforeseen events and how resilient your decision is to changes in the environment.

Despite the fact that things appear to have no immediate payoff, this is not always the case. By thinking second & third order, you'll have less competition because everyone who thinks first order won't think things through. You are more likely to make well informed decisions.