Second order thinking

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  

Thought experiments

Thought Experiments - Mental Model Series -4

"I was sitting on a chair in my patent office in Bern. Suddenly a thought struck me: If a man falls freely, he would not feel his weight. I was taken aback. This simple thought experiment made a deep impression on me. This led me to the theory of gravity." - Albert Einstein 

Thought experiments are conceptual rather than actual experiments. The constitute a powerful tool for understanding the world. Unlike hypotheses in natural sciences , ethical theories cannot be tested emphirically. Purpose of a thought experiment is to help us to face questions which are difficult to answer and encourage speculation, logical thinking and  paradigm shifts .While it may seem counter-intuitive, many of science’s greatest developments in the last century have come from thought experiments rather than physical ones. 

To understand this concept , let us look at the following example.
Galileo’s thought experiment demonstrating (rather counter-intuitively) that two objects of different weight must fall at the same speed

 (Contrary to popular belief, Galileo never actually climbed the leaning tower of Pisa to do this experiment – he didn’t need to.) Galileo knew Aristotle would have predicted that a heavy body (H) would fall faster than a lighter one (L). But, the Italian scientist reckoned, suppose we connect the two bodies by a string, thereby making the compound object H+L. Following Aristotelian physics, one would predict that H+L should fall faster than H by itself because of the compound weight: therefore H+L > H. However, it’s also possible to use the same logic to claim that the compound body should fall at a slower pace than H because of the drag created by L, so that H+L < H. But this yields a contradiction, which means – by reductio ad absurdum – that really H = L = H+L. Neil Armstrong, the first human to set foot on the moon, dramatically showed the whole world that Galileo was right when he let go of a hammer and a feather in the absence of atmospheric friction while standing on our satellite, and, sure enough, they hit the Moon’s surface at the same time. Such is the predictive power of thought experiments!

If you do some research on the internet , you will be surprised to learn how thought experiments contributed to new scientific discoveries. Among scientists, Galileo and Einstein were, arguably, the most impressive thought experimenters. One of the main reasons that scientists go for  thought experiments to make their points is that the theories they work with often deal with unobservable phenomena that are either far too large (think black holes), far too small (think fundamental particles), or far to abstract (think space time or the alternate dimensions required by string theory) for people.

you can find some of the interesting thought experiments here. 

https://www.newscientist.com/article/2087688-the-impossible-barber-and-other-bizarre-thought-experiments/

https://stanford.library.sydney.edu.au/archives/fall2009/entries/thought-experiment/

First principles thinking

First principles thinking- Mental Model Series -3

" Deconstruct then reconstruct." - James Clear 

Photo by Steve Johnson from Pexels

We have a complex problem and we have put on our thinking hat and set out on a mission. we always look for an easy solution  first. We look for an already known example which is close enough of the problem on hand and use an analogy.Sometimes work but many times won't. But there is a better way - "First principle thinking".  It is based on the approach to break down a complex problem into basic elements and reassemble them from the ground up. Let us dig deep further.

What is first principle?
A first principle is a basic foundational assumption that cannot be deduced further and that forms the basis of the thinking in its own particular field. All the other works in that field are based on this basic assumption being true and built up from there. 
Each field usually has some assumptions that form the basic building blocks of the knowledge .These assumptions  are considered very rigid in physical sciences and good approximations in social sciences.

In physics, They are called laws. These are for example the laws of thermodynamics, or Newton’s laws of motion. 

In biology, It is evolution. This is the first principle which shapes how all living things live and behave and why they are the way they are.

In economics, for a long time, the basis of all theory and calculations in the field was the assumptions of the rational actor. All the different economic models built on top of this assumption.

With physical sciences, the first principles are what we assume to be true and are usually pretty solid. On the other hand, in social sciences, the first principles are usually just approximations of the world and so not as solid as the first principles of physical science

For our easy understanding,  Some of the examples of first principle are ,2+ 2 = 4, Male has  two  chromosomes(XY), or definitions like " widow is a women whose husband died", The laws of thermodynamics in physics. 

Application of First principles thinking -

Elon Musk of Tesla used this first principle thinking to solve some of his  very complex problems. He said he borrowed this technique from Physics. In physics , typically you start with a set of basic assumptions  that you hold to be true and  cannot be broken down further and reason up from there . He uses this approach to deduce his problems.

 To understand better , let us take his battery example which goes like this,

"And for batteries, they would say, oh, it’s going to cost – you know, historically it’s cost $600 per kWh and so, it’s not going to be much better than that in the future, and you say no, what are the batteries made of? So first principles mean you say okay, what are the material constituents of the batteries? What is the spot market value of the material constituents? So you can say, it’s got: cobalt, nickel, aluminum, carbon and some polymers for separation and a steel can. So break that down on a materials basis and say okay, if we bought that on the London metal exchange, what would each of those things cost? Like, oh, jeez, it’s like $80 per kWh. So clearly, you just have to think of clever ways to take those materials and combine them into the shape of a battery cell. And you can have batteries that are much cheaper than anyone realizes.”

So Musk challenges the popular assumption that  batteries are expensive and not much can be done about it.  He went down to the basic constituents of battery and the raw materials that made them up to turn that impression upside down.

As we can see, First principles thinking is one of the best way to reverse-engineer complicated problems . Why this is one of the best ways?  our survival instincts favor speed and efficiency over novelty and innovation .Naturally we prefer to take the beaten track and iterate what was already done to gain speed. But no original solutions will emerge from this kind of thinking. So first principle thinking helps to throw away the ideas we inherit ,look at the components and then substituting a more effective solution for one of the key component.

However easy this seems to appear , practicing first order thinking is hard but not impossible . Our tendency to imitate will always stand in the way.We need to consciously overcome this barrier and also some of our cognitive biases. 

Please read the following articles to learn more -

https://gainweightjournal.com/a-short-lesson-on-first-principles-thinking/
https://jamesclear.com/first-principles

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  

Circle of Competence

Circle of Competence - Mental Models Series -2

"I’m no genius. I’m smart in spots and I stay around those spots.”- Tom Watson ,the founder of IBM 

When you don't know what you are doing, you are most likely to make mistakes. This is a no brainer but still most people don't get it and fall for their ego.

Eminent Investor Warren buffet popularized this Term ,Circle of competence. It is about knowing the boundaries of your knowings, 
                                    of your capabilities, 
                                    of your talent, 
                                    its all about what you know(inside your comfortable zone) 
                                    and what you don’t know(outside your comfortable zone).

For ex: You can be a frequent flyer and someone who traveled quiet extensively.With some effort you can understand explain what works for  airlines industry .But if you are asked to explain the mechanics of a aircraft, Unless you are an aircraft engineer by profession,your mind will draw a blank. Correct? 

Once you identify what you know ,what you are just familiar and what you don't know then only the real seeking of knowledge will begin.

Edge of the Circle :-

Lets say you are holding a  Masters degree in accounting and you are a practitioner. Then your CoC is accounting. Also your family is in Furniture business for generations and you have good knowledge of the business . So this also lies within your Circle of Competence. your circle of competence need not come from formal education.

It is absolutely critical to know  the boundaries of your Circle of competence. Warren Buffet quips that  knowing where the perimeter of your Circle of Competence may be is far more important than the size of your circle. 


How to expand this Circle Of Influence:-

 Charile Munger, Warren's best friend and business partner suggested the following-

"Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.”

He goes on to say -

“You don’t have to pee on an electric fence to learn not to do it. Learning from other people’s mistakes is much more pleasant. The best way to do this is simple:  When in doubt, read so you can learn vicariously.”


More on this - from Farnam Street blog

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  

Map is not the Territory

The Map is not the Territory - Mental Model Series -1

 "Everything simple is false. Everything which is complex is unusable."-Paul Valéry

Will you confuse a menu with a meal or road map to a road?- The topic is as simple as this.But understanding this will have profound impact on you.

Maps are the simplified representation of the territory created for certain purpose. The purpose can be  academics, driving, or biking e.t.c..  They are all telling their truths about the area but if you think of it , they are all also incomplete as well.Each map is only a portion of what the real area is.

Let us try to explain this in a different way , 

Imagine you were at a street  and waiting for your friend to arrive .Suddenly a street performer started with his performance . You found it was wonderful. Few moments later, your friend had arrived and you attempt to describe the performance . No matter how good you were with your description , it would never going to be the exact representation of that wonderful performance. your words here are the map. The performance is the territory. Let us continue with this example. At the exact same time when the performance was about to start, there was another person in the same location .Since he was on the phone and he might find the performance rather annoying because he could not continue his conversation. As you can see, Same performance was seen differently by different people. I think you get it now .

So.Models and maps are at best can approximate the actual experience or the actual world that is being examined . But you must keep in mind that actual territory is beyond verbal description.

Our take -

In conflicts, petty arguments  and big fights , people argue based on the their own maps but they fail to realize or remember that each one of  us will come with our own maps which are different from others. 

So remember this, No map is ever completely True. Suggest you  take your thoughts with a grain of salt and become curious about them and try to improve them all the time . Because even territories are dynamic like a river. 

Happy learning!!✌.

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  

Ten Big Ideas

Ten Big Ideas that changed your life?- Brent Beshore Tweeter thread.

1) Imago Dei: Every person is inherently valuable independent of behavior and beliefs. Everyone matters. Treat people accordingly, without exception.

2) Rationality: In the moment, people act rationally, always. The question is what information, preferences, time horizon, and biases came into play? Removes ability to write-off people/behavior. Forces learning and empathy.

3) Meaningful = Hard: If something worthwhile appears easy, it means I got lucky. Or, I've never done it. Crucial to setting opportunity costs, evoking gratitude, suppressing envy, and cheering others on.

4) Base Rate: The average of how others do is the mostly likely indicator of my future performance. I want to get into situations where the base rate is attractive.

5) Messy: Life is messy. People are messy. Business is messy. Relationships are messy. I’m messy. Messiness should never be surprising. Give myself and others grace.

6) Margin of Safety/Redundancy: Stuff happens. Expect it and be prepared. Applies to virtually every area of life and far beyond investing — engineering, organizational operations, relationships, health, personal finances, etc.

7) Serving vs. Served: The great paradox of life is self-sacrificial service. More I give, with no expectation of reciprocity, the better life goes for others and me. Counterintuitive and countercultural.

8) Non-Linearity: I expect orderly, sequential outcomes. I get compounding, with unexpectedly positive and negative outcomes. Expect the unexpected. Get better at ball-parking nonlinear results.

9) Forgotten: In 100 years, no one will know my name. And certainly, no one will know me and I won’t know them. Living for fame and recognition is like chasing the wind. I try re-read Ecclesiastes monthly.

10) Invert: Avoiding failure is a heck of a lot easier than trying to be successful. Understand predictable points of failure (probability + magnitude) and plan against them. And don't worry, failure will still come often.

Reinvent yourself - James Altucher Twitter thread

Reinventing Yourself: By James Altucher(@jaltucher)- (from his tweet thread)

1. Reinvention Next Stops - every day YOU DECIDE forward to backward

Reinvention starts from scratch. no labels. Ivy league? You lost millions? You were a champ? Nobody cares. You're a zero.

2.You need a mentor:

3 types of mentors: Direct: someone you work with who helps you correct mistakes. indirect: someone you admire and want to emulate. virtual: someone you read about. many you read about.

don't worry if you don't have a passion for anything - you have a passion for health. a passion for transformation. start with that. more passions will come.

3.Time it takes to reinvent yourself: five years.

Here’s a description of the five years:

Year One: you’re flailing and reading everything and just starting to DO.

Year Two: you know who you need to talk to and network with. You’re Doing every day.

Year Three: you’re good enough to start making money. It might not be a living yet.

Year Four: you’re making a good living

Year Five: you’re making wealth

Sometimes I get frustrated in years 1-4. I say, “why isn’t it happening yet?” That’s okay. Just keep going. Or stop and pick a new field. It doesn’t matter. Eventually you’re dead and then it’s hard to reinvent yourself.

If you do this faster or slower than five years then you are doing something wrong.

4.It’s not about the money.

But money is a decent measuring stick.

Q:“What about just doing what you love?” 

There will be many days when you don’t love what you are doing. The entire idea of improvement is there will be many unpleasant days you will fail and be miserable

Happiness is just a positive perception from our brain. Some days you will be unhappy. Our brain is a tool we use. It’s not who we are. Reinvention is not about happiness. It's about always knowing "who am i", "why am I", "why now"

Q:When can you say, “I do X!” where X is your new career?

Today.

Q:When can I start doing X?

Today. If you want to paint, then buy a canvas and paints today, start buying 500 books one at a time, and start painting. If you want to write do these three things:
Read
Write
Repeat,

Q:How do I make money?

By year three you’ve put in 5,000-7,000 hours. That’s good enough to be in the top 200-300 in the world in anything. The top 200 in almost any field makes a living. By year 5 you will make wealth if u r truly improving 1% a day

What is “it”? How do I know what I should do?

Whatever area you feel like reading 500 books about. Go to the bookstore and find it. If you get bored three months later go back to the bookstore. Or study your instagram and see what you love taking pictures of? Or...

List what you loved at age 13 and figure out how it has aged.

It’s okay to get disillusioned. That’s what failure is about. Success is better than failure but the biggest lessons are found in failure.

Very important: There’s no rush. You will reinvent yourself many times in an interesting life. 

Many reinventions make your life a book of stories instead of a textbook.
Some people want the story of their life to be a textbook. For better or worse, mine is a book of stories.

The choices you make today will be in your biography tomorrow.

Make interesting choices and you will have an interesting biography.

Q:What if I like something obscure? Like biblical archaeology or 11th-century warfare?

Repeat all of the steps above, and then in year five you will make wealth. We have no idea how. Don’t stress to find the end of the road when you are still at the very first step.

Q:What if my family wants me to be an accountant?

How many years of your life did you promise your family? Ten years? Your whole life? Then wait until the next life. Choose freedom over family. Freedom over preconceptions. . Freedom over people-pleasing. Then you will be pleased.

Q:My mentor wants me to do it HIS way.

That’s fine. Learn HIS way. Then do it YOUR way. With respect

My spouse is worried about who will support/take care of kids?

Then after you work 16 hours a day, seven days a week being a janitor, use your spare time to reinvent.

Someone who is reinventing ALWAYS has spare time. Reinvention is collecting little bits and pieces of time

Q:What if my friends think I’m crazy?

What friends?

Q:What if I want to be an astronaut?

That’s not a reinvention. That’s a specific job. If you like “outer space” there are many careers. Richard Branson wanted to be an astronaut and started Virgin Galactic.

Q:What if I like to go out drinking and partying?

Read this post again in a year.

Q:What if I’m busy cheating on my husband or wife or betraying a partner?

Read this post again in two or three years when you are broke and jobless and nobody likes you.

Q:What if I have no skills at all?

Start from the top.

Q:What if I have to focus on paying down my debt and mortgage?

See above about "spouse"

Q:How come I always feel like I’m on the outside looking in?

Albert Einstein was on the outside looking in. Nobody in the establishment would even hire him.

Everyone feels like a fraud at some point. The highest form of creativity is born out of skepticism.

Q:I can’t read 500 books. What one book should I read for inspiration?

Give up.

Q:What if I’m too sick to reinvent?

Reinvention will boost every healthy chemical in your body: serotonin, dopamine, oxytocin. Don’t use health as an excuse.

Eat better. Exercise. These are key steps to reinvention and are natural antidepressants.

Q:What if my last partner screwed me and I’m still suing him?

Stop litigating and never think about him again. Half the problem was you, not him

Q:What if I’m going to jail?

Perfect. Read a lot of books in jail.

Q:What if I’m shy?

Make your weaknesses your strengths. Introverts listen better, focus better, and have ways of being more endearing.

Q:What if I can’t wait five years?

If you plan on being alive in five years then you might as well start today.

Q:How should I network?

Make concentric circles. You’re at the middle.

The next circle is friends and family.

The next circle is online communities.

The circle after that is meetups and coffees, conferences and thought leaders, mentors, customers,

Q:What if I’m passionate about two things? What if I can’t decide?

Combine them and you’ll be the best in the world at the combination.

Q:What if I’m so excited I want to teach what I’m learning?

Start teaching on YouTube. Start with an audience of one and see if it builds up.

Q:How do I meet mentors and thought leaders?

Once you have enough knowledge (after 100-200 books), write down 10 ideas for 20 different potential mentors.

None of them will respond. Write down 10 more ideas for 20 new mentors. Repeat every week.

Put together a newsletter for everyone who doesn’t respond. Keep repeating until someone responds. Blog about your learning efforts. Build community around you being an expert.

Q:What if I can’t come up with ideas?

Then keep practicing coming up with ideas. The idea muscle atrophies. You have to build it up.

It’s hard for me to touch my toes if I haven’t been doing it every day. Don't expect to come up with good ideas on day one.

Q:What if I do everything you say but it still doesn’t seem like it’s working?

It will work. Just wait. Keep reinventing every day.

Don’t try and find the end of the road. You can’t see it in the fog.

Q:What if I get scared?

Sleep 8-9 hours a day and never gossip.

Q:What if I keep feeling like nothing ever works out for me?

Spend 10 minutes a day practicing gratitude. Don’t suppress the fear. Notice the anger.
Gratitude is the bridge between your world and the parallel universe where all creative ideas live.

Q:What if I have to deal with personal bullshit all the time?

Find new people to be around.

Someone who is reinventing herself will constantly find people to try and bring her down.

The brain is scared of reinvention because it might not be safe.

Biologically, the brain wants you to be safe and reinvention is a risk. So it will throw people in your path who will try to stop you.

Learn how to say “no.”

Q:What if I’m happy at my cubicle job?

Good luck.

Q:Why should I trust you – you’ve failed so many times?

Don’t trust me.

I was forced to reinvent my whole life at ages 21, 24, 26, 30, 31, 32, 34, 37, 40, 41, 42, 46, 47, 49, and now. today.