Second Order Thinking & Why Its Important

Second Order Thinking - The Smart Way To Make Decisions

Did you know that the decision-making process is as much an art as a science? As a cognitive process, decision making is the selection of a course of action from several possibilities. While many people strive to make the perfect decisions, it's much better to start making average decisions and progress to make better ones.

To gain insight into the decision-making process and make fewer mistakes, it is wise to use second-order thinking. Second order thinkers think differently and as a result, they usually end up getting unexpected or extraordinary results.

“Experience is what you got when you didn’t get what you wanted.”

— Howard Marks

The ability to think through problems to the second, third, and nth order—or what we will call second-order thinking for short—is a powerful tool that great thinkers use to their advantage all the time. To achieve extraordinary results, one must incorporate extraordinary actions.

What Is Second Order Thinking?

Howard Marks, the author of “The Most Important Thing” and founder of Oaktree Capital, describes second order thinking as “deep, complex and convoluted.” In the book, the author describes first thinking as “simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority.”

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

— Charlie Munger

Differences Between First Order And Second Order Thinkers

First order thinkers are described by Howard Marks as people who make simple and superficial decisions. For instance, in cryptocurrency trading, a first order thinker will hope for favorable results. That means the crypto-trader will hope for an increase in prices in order to make profits. When it comes to second order thinkers, they are deep and complex. Simply put, they take into account a lot of variables before making a decision. For instance, in cryptocurrency trading, instead of the trader hoping for the prices to increase in order to make short-term profits, he or she will take in different variables to determine if cryptocurrencies are viable as long-term investments.

 First order thinkers choose to make their decisions based on simple and easy things. Basically, they fear taking more time to research and take into account complex factors. For them, the first answer that pops into their minds is what they go with. Second order thinkers think in terms of interactions and they are not afraid to research and even spend more time before making the final decision.

According to the author of “The Most Important Thing”, first order thinkers think alike. To quote his book “The difference in workload between the first level and second level thinking is clearly massive and the number of people capable of the latter is tiny compared to the number of the former... First level thinkers think the same way other first level thinkers do about the same things, and they generally reach the same conclusions...”

Simply put, they use the same approach finally coming to the same conclusion. For second order thinkers, they think differently. If presented with the same problem, each individual will come up with a different conclusion. Imagine this, if first-order thinking was the norm, things like bulls and bear would never be a thing.

How To Use Second Order Thinking

Always think in terms of relatives and never absolutes. This is very important especially when it comes to the stock market. The stock market is all about expectations such as the rise and fall of a stock price. On the stock market, it's not always about less good or less bad. It's about studying the charts and indicators before making the final decision – to buy or sell.

Take the time to consider the difference between value and price. All assets can make a good investment. One asset can fetch a higher price while another can get a poor one. By taking into account the value and price of the asset, you will be able to make a smarter decision.

Always consider both sides of an investment decision or argument. As a second-order thinker, you have to seek out opinions different from your own. What you ought to know is that no one is right at all times. By thinking about where you could go wrong, it demonstrates a high level of intelligence and self-awareness.

Lastly, never judge your decisions based on the outcomes but rather on the process taken to realize them.

Final Thoughts

Taking the easiest way when it comes to decision making is not the best way to go through life but when you take into account different outcomes and variables, you will be in a better position to come up with smarter decisions. Never fear to be wrong, unlike first-order thinkers who think they might look foolish. Taking risks is the best way to come up with smart decisions.


If you want to have fun at work this week, do one of two things. First, start digging below the surface of people’s opinions. Ask people why they think what they think. Second, ask them to take the other side of the argument.

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Michael


Michael Carrington is an entrepreneur, international consultant, and founder of successful brands in the U.S and Australia. With over 13 years of business leadership experience he has since decided to leverage his corporate finance and MBA experience to help others achieve wealth and financial abundance. Michael is passionate about entrepreneurship - he mentors and shows individuals how to earn a lucrative income with online entrepreneurship.

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