Second-Level Thinking: How to Avoid Costly Mistakes

In his book The Most Important Thing, investor Howard Marks explains the difference between first- and second-level thinking:1

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 favorable, meaning the stock will go up.” Second-level thinking is deep, complex and convoluted.

First-level thinkers look for answers that are quick and easy. Second-level thinkers look for solutions at the second, third, and nth order.

The ability to move past first-level thinking is crucial to avoid poor decisions and costly mistakes. That’s because second-level thinking is how you identify the consequences of a decision before they happen.

Solutions Can Create Even Worse Problems

Consider, for example, the introduction of the cane toad in Australia. In 1935, about 3,000 of these warty amphibians were released in the sugarcane plantations in north Queensland with the hope that they would hunt and kill cane-destroying beetles in the area.

Unfortunately, the cane toads turned out to be bad beetle hunters, partly because the cane fields provide inadequate shelter during the day, and partly because the beetles live at the tops of sugar canes, and the toads are bad climbers.

They have, however, been remarkably successful at reproducing and spreading themselves. Today, there are millions, if not billions, of cane toads in Australia. Their still-expanding range covers thousands of square miles in the northeastern part of the country.

And while they haven’t been effective in reducing beetles, they’ve had marked effects in other parts of Australia’s ecology. Examples include the depletion of native species, the poisoning of pets and humans, depletion of native fauna, and reduced prey populations for native insectivores, such as skinks.

Because of all that, cane toads are now considered pests themselves, and government eradication efforts include asking residents to help collect and dispose of them.2

Whoops.

First-Level Thinking vs. Second-Level Thinking

First-level thinking: These toads will kill the pests we hate. Second-level thinking: These toads have few natural predators here, they breed easily, and they’ll have abundant food. They will become the pests.

The takeaway? When you’re facing a complex problem or difficult decision, think deeply about the knock-on effects of each solution or option. Howard Marks outlines his process for second-level thinking as a series of questions like:

  • What is the range of likely future outcomes?
  • Which outcome do I think will occur?
  • What’s the probability I’m right?
  • What does the consensus think?
  • How does my expectation differ from the consensus?

By digging deeper than the first level, and carefully evaluating what you find at the levels below, you can spot negative consequences before they arise. And that will help you make better decisions and avoid serious mistakes.

Footnotes

  1. The Most Important Thing by Howard Marks
  2. Cane Toad

This article is an excerpt from my book The Decision-Making Blueprint.