The Power of “Second-Order Thinking”

Today’s most successful leaders and entrepreneurs are capable of thinking in the Second-Order.

Often synonymous with Game Theory, Second-Order thinking is the practice of anticipating not only the immediate consequences of a decision, but the consequences of those consequences and so on. The word “Second” in this case, refers to the second layer of outcome.

In high school, I considered myself a fairly capable chess player. In one particular instance, I had the opportunity to compete against the reigning champion of my high school circuit. Both myself and my contender understood the power of anticipatory strategy however the degree to which we were able to enact that strategy would dictate the outcome of that critical round. I fondly remember my decision to allow my opponent to take the lead, which ultimately gave him the ease to put his guard down. I saw that reaction as my primary indicator to turn the tables and that day, I walked away victorious. It’s one of my earliest memories of Second-Order thinking and it remains an example I use to this day.

It is simple to think in the First Order. In his book Thinking Fast and Slow, behavioural psychologist and economist Daniel Kahneman (widely considered to be a founder of Behavioural Economics) refers to the first order as “Fast Thinking” – reactionary, immediate and with less foresight. When we are hungry, our immediate thought is to eat food. When we are uncomfortable in a situation, we instinctively adjust for comfort. When there is an opportunity for reward, we act quickly to receive that gratification.

When we think in the Second-Order, we ultimately have more control of our destiny. In some cases – like my high school encounter – we are able to use that foresight to insight success and even power over a given scenario or contender.

When hungry, Second-Order minds will consider what they are eating, how it impacts their body, what their diet is doing to their mind and subsequently their productivity and their energy.

When uncomfortable, Second-Order minds will consider the risk and reward of adjusting. It may be that discomfort is only a temporary means to an end and that the reward of persevering will allow you to succeed in the long-term. Start-up entrepreneurs understand the value of sweat equity. Star athletes know the importance of persevering through pain and tenuous stress.

When there is an opportunity for reward, Second-Order minds understand the importance of delayed gratification.

Second-level thinking is significantly more deliberate. It asks you to use foresight, creativity and to solve problems and reveal variable scenarios. It’s also a tool for being competitive, for outthinking others. It is a tool for mitigating crises, rebuilding from loss. It is a tool for following one’s career path and implementing some of the adaptive skills that you have upgraded in your life, to maneuver your desired path. To be successful in one’s own journey or in their support of others, Second-Order thinking must be a skill that we cultivate.

How can I train myself to think in the Second-Order and benefit from this sort of decision making?

It begins by recognizing that Second Order thinking is atypical for most people. The process is often challenging, counterintuitive and requires a sense of deduction and creativity. The original terminology of First-Order and Second-Order thinking was coined by Howard Marks who considered the first order to be a “typical thought process”. The type of thinking that we are hardwired to do without much effort. When we practice Second-Order thinking, in effect, we are adding greater complexity to how we approach processes that would otherwise be typical for us.

Once we understand that greater effort is required in our daily decision-making, there are a number of best practices that we can use to condition our behaviour.

Here are a few of the tactics I have used over the years:

• Develop a greater interest in Design Thinking. This type of thinking dictates that we redefine the problems we face, challenge our own assumptions and consider a diversity of solutions. Great design thinkers look at most of the decisions they face with optionality – where there is one solution, there must be others. Design thinking often involves creativity, empathy and the willingness to take risks and experiment. By conditioning ourselves to problem solve and create in this broad sense, we are forced to think in the Second-Order. It’s common practice for academics and investment professionals.

• Consider the importance of feedback. In its simplest form, feedback is characterized as the understanding of cause-and-effect. When we have an opportunity to receive feedback it may largely influence the decisions we make – it may encourage us to choose differently. When we seek opportunities to receive feedback, the very process of identifying those opportunities, encourages Second-Order thinking, regardless of the content of that response.

• Challenge your past convictions. In Second-Order thinking, your preconceived notions are your worst enemy. When we think in the First-Order, we tend to default to what we already understand, what is instinctual. We make decisions based on a set of linkages that we’re comfortable with. By learning to suspend those preconceptions and convictions, we open up space to think in alternative ways. We are able to look at a variety of outcomes and forecast with a consequential approach.

• Practice Second-Order thinking in low stakes situations. Pursue that practice frequently. For me, it was endless chess matches in high school that would catalyse years of personal conditioning. Today, it’s a skill that I use in negotiation, business planning and development and in my own investment and philanthropic ventures. I also use it in my personal life – anticipating how my decisions will impact my family and friends.

To me, and many of the entrepreneurs and leaders in my life, this sort of anticipatory thought is a critical soft-skill. I often consider it the closest skill we have to observing the future and perhaps humanity’s most defining feature.

To become masterful at this skill takes a lifetime. However, by practicing Second-Order thinking, you will have greater control of the path of your life – anticipating optionality at every turn.

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