Lesson 6: Second level thinking

First-level thinking is simplistic and superficial, and everyone can do it. All the first-level thinker needs is an opinion about the future, for instance “That horse has won the past 5 races, it’s a shoe-in for the next race”.

In that sense first-level thinkers look for things that are simple, easy, and defendable. They fail to realise that they are dealing with complex systems, or if they do realise it, they mistake cause-and-effect relationships.

By contrast, second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account: 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?; and how does my expectation differ from the consensus? If that happens, what will that mean for A, B and C, and if B subsequently happens what will that mean for Z?

One of the best examples of second level thinking comes from the economist John Maynard Keynes who wrote about a fictional newspaper contest. Out of 100 photographs, participants had to pick 6 faces whom they think is the ‘prettiest’. The person who has gotten the most choices right is the winner and will receive a prize.

Pause for a moment and imagine yourself to be a participant in this newspaper contest. How would you play this game? Faced with 100 smiling faces, how would you approach the task on hand and select the winner? According to Keynes:

“It is not a case of choosing those (faces) that, to the best of one’s judgement, are really the prettiest, nor even those that average opinion thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

Second level thinking is clearly hard work, and it carries risks too for those fearful of being wrong and looking foolish. Again, Keynes captured this best, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

That’s a mistake. Remember, conventional thinking gets conventional results. Think unconventionally.

How to use second level thinking to make better decisions

  • Dig below the surface: Ask people why they think what they think. Try and find the holes in their analysis. Everyone wants to find the easy answer and move on to the next problem, but the best solutions are often found by digging a little deeper.
  • Take the other side of the argument: Some of the problems we face in our lives can often be solved by approaching them from the opposite angle. According to the investor Charlie Munger, “The mental habit of thinking backwards forces objectivity — because one of the ways you think a thing through backward is to take your initial assumption and say, “Let’s try and disprove it”.”

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