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Second-Level Thinking: What Smart People Use to Outperform

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

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Second Order Thinking

Successful decision making requires thoughtful attention to many separate aspects.

Decision making is as much art as science. The goal, if we have one, is not to make perfect decisions but rather to make better decisions than average. To do this we require either good luck or better insight. And since luck isn’t really much of a plan, we should probably focus on better insight.

In most of life you can get a step ahead of others by going to the gym or the library, or even a better school. In thinking, however, a lot of what you’d think gets you ahead is only window dressing.

Would be thinkers and deciders can attend the best schools, take the best courses and, if they are lucky, attach themselves to the best mentors. Yet only a few of them will achieve the skills and superior insight necessary to be an above average thinker. And we live in a world that, if it rewards anything, rewards better decisions. The rest is increasingly automated.

But how do we get there in a world where everyone else is also smart and well-informed? How do we get there in a world that is increasingly becoming computerized? You must find an edge. You must think differently.

In his exceptional book, The Most Important Thing, Howard Marks hits on the concept of second-level thinking.

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.

Second-level thinkers take into account a lot of what we put into our decision journals. Things like, What is the range of possible outcomes? What’s the probability I’m right? What’s the follow-on? How could I be wrong?

“Second-level thinking is deep, complex and convoluted.” Click To Tweet

The real difference for me is that first-level thinkers are the people that look for things that are simple, easy, and defendable. Second-level thinkers push harder and don’t accept the first conclusion.

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

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Marks writes:

First-level thinkers think the same way other first-level thinkers do about the same things, and they generally reach the same conclusions. By definition, this can’t be the route to superior results.

This is where things get interesting. Extraordinary performance comes from being different. It must be that way. Of course, below average performance comes from being different too — on the downside.

So it’s not enough to be different — you also need to be correct. “The problem is that extraordinary performance comes only from correct nonconsensual forecasts, but nonconsensual forecasts are hard to make, hard to make correctly and hard to act on,” writes Marks. The goal is not blind divergence but rather rather a way of thinking that sets you apart from others.

In short, you can’t do the same things that other people are doing and expect to outperform.

We can look at this as a simple two-by-two matrix (via The Most Important Thing).

Second Level Thinking Matrix

I’m generalizing a bit here, but if your thoughts and behavior are conventional, you’re likely to get conventional results. Steve Jobs was right.

This is where loss aversion comes in. Most people are simply unwilling to be wrong because that means they might look like a fool. Yet this is a grave mistake. The ability to risk looking like an idiot is necessary for being different. You never look like a fool if you look like everyone else. (Bringing to mind Keynes’ dictum: Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.) Only by doing — or, in our case, thinking — something different do you put yourself at risk.

JOHN MAYNARD KEYNES

Conventional thinking and behavior is safe. But it guarantees mediocrity. You need to know when your performance is likely to be improved by being unconventional.

Here’s a pro tip. 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 them why they think what they think. Second, ask them to take the other side of the argument.

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