Second-Order Thinking: How to Uncover Hidden Consequences While Making Decisions

As a kid, I used to watch a lot of Discovery and NatGeo. This one time I remember seeing a group of leopards surround an innocent deer and kill it mercilessly. They tear up this poor animal into pieces, and then devour it. I remember I felt very sad for the victim. Naturally!

My mother consoled me. She said that it’s for the greater good. This is how nature maintains the balance. While I understood the overarching theme, it wasn’t enough for me to find solace. It still felt horrible!

As I grew up, I began to ponder. Was it really horrible, or did I consider it horrible just because it felt horrible as a kid? I asked myself, if I separate my feelings from this, would the world be a better place if this event, or similar events that feel horrible, don’t occur at all?

This perspective drove me to consider the second-order consequences of an event. Had such an event not occurred, it would have definitely made me feel better as a kid. That is the first-order consequence. But what my mother explained to me, that this would imbalance the work of nature, was a second-order consequence.

Nature optimises for the whole, not for the individual. But most people judge good and bad based only on how it affects them. First-order thinking is superficial at best, reactionary, and obvious. Our System 1 can handle them well.

When the deer was hunted and killed, what I had seen was the process of nature at work. This is an important process as it furthers the improvement of the whole than any process man has ever invented. This realisation is not obvious. You reach this conclusion only when you separate your feelings, and begin to dig deeper. When you put your System 2 to work.

In his book, The Most Important Thing, investor and co-founder of Oaktree Capital, Howard Marks writes:

“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favourable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.”

People who overweigh the first-order consequences of their decisions and ignore the effects of second- and subsequent-order consequences rarely reach their goals.

This is because first-order consequences often have opposite desirabilities from second-order consequences. This results in big mistakes in decision making. Especially when you are treading in uncharted territories.

For example, the first-order consequence of exercises are pain and time spent. They are commonly considered undesirable. While the second-order consequences are better health and more attractive appearance. They are highly desirable.

In other words, first-order thinking happens when we look for something that only solves the immediate problem, without even considering the consequences.

Second-order thinking is more deliberate. The second-order thinker has to take a great many things into account. It starts when you ask yourself, “And then what?”

It happens when you think through time—what do the consequences look like in a couple of minutes, a few months later, or in a decade?

Second-order thinking also happens when you think through stakeholders—how are the various people involved going to get affected by this? If you are a company, how does your new growth hack affect your support executives, your logistics, or even your competitors? How are they going to react to it?

While making important decisions you should always think through the 1st, 2nd, and 3rd order, and identify the consequences. This will help you calibrate your thinking. It can be when you are buying a new house, or when you are starting a new business.

Quite often the first-order consequences are clouded by temptations. You are craving for that candy, or thinking about avoiding that exercise. The world throws these types of trick choices at us all the time, and penalises us when we base our decisions on the first-order consequences.

In his excellent book Principle: Life and Work, billionaire investor Ray Dalio writes:

“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.”

Take the example of fully autonomous electric vehicles. If they were to become the norm tomorrow, what are the first- and second- order consequences? Half of global oil consumption is used to produce gasoline. So, reducing gas consumption is a clear first-order consequence.

Moving to electric also reduces the number of moving parts in a car. That remakes the car industry and its supplier base, but it also changes the repair environment, and the life of a vehicle. Think of the industries that can benefit or lose from this consequence.

Fully autonomous tech would eventually lead to no lanes, no separation, no stopping distances, and no signals, except of course for pedestrians to cross. This means extremely different traffic patterns, less congestion, and faster commute. Think of what we can do with the time we’ll save.

Also, if gasoline were to be a thing of the past, all those people working at the gas stations would have to find new sources of income (unless there are radical changes in how long it takes to charge an electric vehicle). And surprisingly, tobacco sales would go down as well, since over half of US tobacco sales happens at gas stations.

These are only a few of the consequences of going full electric and autonomous. There are countless other ramifications. Benedict Evans wrote an excellent analysis on this which I recommend you should definitely read.

Before I end, a word of advice from me. Hunt for things that are first-order negative, and second- or third-order positive. They are painful, and doesn’t give any immediate returns. That is why a lot of people avoid doing them.

But they have profound second- and third-order returns. Reading books, going to the gym, avoiding junk food, thinking in second- and third-order, etc., are all good examples. Focus on them.