Elevate Your Thoughts with Second Order Thinking
Market Meditations | March 25, 2021
First order thinking is the process of considering direct consequences. Let’s take a falling market. First order thinking says, the price is falling, we are losing money and therefore we should sell. Second order thinking is the process of considering all the knock on impacts arising from these direct consequences. It says, because everyone is losing money, they are panic selling meaning the price is low and therefore this is a great time to buy.
Second order thinking can elevate our thoughts and help us understand future outcomes but how can we apply this to our own lives?
- Always be curious and question everything. Diving deeper into a problem allows you to understand probable knock on effects and plan accordingly.
- Write down the intended consequences of an action / event and then consider the subsequent consequences of each of these. This will allow you to understand all possible outcomes.
- Think across time. ? What will the consequences be in 1 minute, 1 day, 1 year, 10 years and so on? This ensures that we are always prepared for the future.
We can also use this mental model to create insights into investing and personal finance:
- Always consider your investment decisions on a portfolio level. Each time you buy or sell an asset you change the makeup of your overall portfolio. Make sure you are not accidently increasing exposure to a certain asset or altering the risk profile.
- When spending money, think about the future financial impact. Will this purchase save me money or cost me more in the future?
- Think about the time impacts of an investment. Some investments such as regular purchases of index funds require no maintenance whereas others such as an investment into a business may take up the majority of your time. When investing, always consider not just how much money it costs you, but also how much time. ⌚
Second order thinking is a powerful tool we can use to supercharge our decision making process. Be deliberate with your thoughts and elevate your ability to build wealth.