Second Level Thinking: Strategy For Developing An Unfair Advantage

 

Actions have consequences.

It’s one of the first ways we learn to think through our decisions. Relating one thing to the next and reasoning what the potential outcomes could be. Often we’re taught this to avoid something negative.

Over time this causes us to focus more on making sure we’re not wrong. Our decisions become guided by our desire to not look like a fool as we’re told it’s better to “fail conventionally than to succeed unconventionally.” (John Maynard Keynes)

Yet, even though we play it safe we still want unconventional, positive, results.

The secret most people choose to ignore is that extraordinary outcomes don’t come from thinking like everyone else. They come from being different. From an ability to see opportunity where others don’t or are too afraid to look.

This means if you want an advantage you have to think past where everyone else stops. You have to think beyond your initial reaction and question what could happen at the second, third, nth level of a problem.

The process of doing this is called Second-Level thinking and it’s how smart people increase their odds of a positive outcome.

 

THE BASICS

In his book, The Most Important Thing, investor Howard Marks explains the difference between first-level and 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 thinking asks us to do a lot more. It asks that we consider things from every perspective to find leverage or a secret we believe in.

The second-level thinker goes through a much more complex process when thinking about buying an asset. Is it good? Do others think it’s as good as I think it is? Is it really as good as I think it is? Is it as good as others think it is? Is it as good as others think others think it is? How will it change? How do others think it will change? How is it priced given: its current condition; how I think its condition will change; how others think it will change; and how others think others think it will change? And that’s just the beginning.

It is meant to be hard.

 

COMMON THINKING

The majority of people, “first-level thinkers see what’s on the surface [and] react to it simplistically”. They think like everyone else and typically come to the same conclusion.

They fail to see the systems at play.

They don’t understand that once something happens they’re required to continually adapt and consider all possible outcomes from each new reality.

Rather, they rely on conventional wisdom and biases to inform their view of the world. The easy way to do this is to take the opinion of the majority. By copying others one can ensure that whatever happens, they’ll have counterparts who be in a similar situation.

But, as we know, common thinking results in common outcomes.

Meaning if you want extraordinary results you have to be willing to play at the extremes. To step away from the general consensus and be comfortable with being uncomfortable.

The exceptional life depends not on working harder, but on different, even opposite, actions from habit and the crowd. - Ralph Waldo Emerson

 

MORE THAN DIFFERENT

However, you can’t only be different.

You also need to be right.

Remember, actions have consequences and the nature of playing at the extremes means you can also be extremely wrong.

Marks states, “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.”

Essentially you have to predict the future -- which no one can accurately do.

The future as Peter Thiel describes it is “ simply the set of all moments yet to come” and says “we know two things [about it]: it’s going to be different, and it must be rooted in today’s world.”

This means we have to take what we know to be absolutely true and model what we think may happen given a set of varying parameters. The purpose, of course, is to determine what course of action will give us the highest probability of a positive outcome.

 

IMPLICATIONS

The simple nature of you taking a different point of view means you’ll be challenging the credibility of everyone else. In number they are able to delude themselves into conviction, however, their position is supported only by the idea of “everyone else think this way too, surely, we cannot all be wrong.”

After observing the general public Machiavelli wrote that “Other mistakes that are made by the populace in judging of things and of the properties of things in general also vanish when they come to study them in detail.”

Going to show that when an opinions only strength is due to it being the opinion of the majority the thinness of the argument is revealed in short order once it comes into question.

And when you stand by your position the easy thing for them to do is to let you know that you are in fact, the fool.

However, you have to remember that the future materializes over time. “Conventional beliefs only ever come to appear arbitrary and wrong in retrospect”, says Thiel. So you’re best to let things play out as you’ve thought them through in much more detail.

Your ability to accept delayed gratification is what makes Second-Level thinking work. You know something they don’t.

 

PROCESS & PERSPECTIVE

Second-level thinking isn’t so much a set of steps to follow as opposed to a more advanced way of developing your own perspective.

While each situation will be different, your desired outcome remains the same -- to have an advantage others don’t.

Marks succinctly outlines the perspective as this:

Remember your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss, or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others ... which by definition means your thinking has to be different ...

Understanding that things happen over time, are a part of complex systems and defy conventional thinking is hard to do. Yet, Second-Level thinking is one of the few ways you can think for yourself and increase your probability of achieving extraordinary results.


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