Second order thinking - Mental Models Series - 5
" It is not suppose to be easy. Anyone who finds it easy is stupid" - Charlie Munger on superior returns from market investments.
Decisions have consequences.The consequences may be both direct and indirect,immediate and long term. Therefore, when making decisions, one needs to consider not just the immediate and obvious consequences of the decision, but also the indirect and long term, which can frequently be nuanced, complex, and hidden from surface.
As usual let us try to understand with some simple examples -
Remember your childhood, Ever wondered why your mom wanted you to eat those peas and broccoli, even though you fervently denied to eat them and threw them to the floor ?
Because she knew of the second-order consequence (eat vegetables to become a healthier, stronger baby), but your short-sightedness caused you to focus on the first-order consequence (peas and broccoli are not exactly yummy candies).
Here is another one, Going to a gym and lifting weights makes you to think about the first-order consequences such as discomfort and pain, so you tend to forget the second-order consequences of getting healthier and lean.
On the other hand , Indulging in sweets and junk food may make you feel good today, but will destroy you in a few years. Lying to your friends and people around you will get you what you want today, but will crumble all your relationships in the future.
A lot of extraordinary things in life are the result of things that are first-order negative, second order positive. More than often you will have less competition because every one will not think deep enough to go past first order negative . This is where you can separate yourself from masses
"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." - Ray Dalio
Ok. Now, how to become a second-order thinker?
Let us learn from the best: in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, Howard Marks gives the following example of questions a second-level investor might ask themselves before making an investment:
- What is the range of likely future outcomes?
- Which outcome do I think will occur?
- What is the probability I'm right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future, and with mine?
- Is the consensus psychology that's incorporated in the price too bullish or bearish?
- What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?
Footnote -
What are Mental Models ?
“It’s your mind’s toolbox for making decisions. The more tools you have, the more equipped you are to make good decisions. “
A mental model is an explanation of how something works. It is a concept, framework, or worldview that you carry around in your mind to help you interpret the world and understand the relationship between things. Mental models are deeply held beliefs about how the world works.
For More , read https://jamesclear.com/feynman-mental-models