Second-order thinking
Every decision has an immediate effect and then the effects of that effect. Learn to ask 'and then what?', to see how people will react to the incentives you create, and when to stop following the chain.
WHY THIS MATTERS
The first effect is the one everybody sees
Expected value asked you to weigh outcomes. But which outcomes? Most people stop at the first one: the pay rise, the discount, the hour saved. The first effect then causes other effects, and those are often bigger and point the other way. Thinking one step further than most people is a real advantage, and it costs one question: and then what?
Staying up two hours later to finish a series: first effect, pleasure tonight. And then? A slow morning, a worse day at work, an early-evening nap, and another late night.
Second-order thinking
Looking past the immediate result of a decision to the results of that result: how the situation changes, how other people respond, and what that sets in motion. First-order thinking asks 'what happens?'. Second-order thinking asks 'and then what happens because of that?'
First order: a new road will cut my commute. Second order: a faster road attracts more drivers and more housing along it, and within a few years the traffic may be back.
Worked example: the better-paid job
- The decision
Niloufar is offered 30% more pay. The office is 90 minutes from home each way; her current job is 25.
- First order
More money every month. This is where most people stop and sign.
- And then what?
More than two extra hours on the road every working day. That time has to come from somewhere: the gym, cooking, sleep, evenings with her family.
- And then?
Less sleep and exercise, more bought food and taxis eating part of the rise, and less energy at the new job she wanted to shine in.
- What she does with this
She doesn't refuse. She asks for two remote days a week, and prices a move closer. The chain turned a yes-or-no into a better negotiation.
Check yourself
Hamed's online shop is slow this month. He plans to offer 40% off everything, every weekend, from now on. First-order effect: more weekend orders. Which second-order effect should worry him most?
- The website might get slow on weekends when everyone orders at once
- He'll need to write a new banner every week, which eats time he doesn't have
- Some customers won't notice the discount, so he'll have to spend more on advertising it
- Customers learn to wait for the weekend, so full-price weekday sales shrink
Show the answer
Customers learn to wait for the weekend, so full-price weekday sales shrink
Yes. A predictable discount changes how customers behave. They don't buy more overall; they move their buying to the cheap days, and his margin goes with them.
THE ENGINE
People respond to incentives, not intentions
Most surprising second-order effects come from one source: you change what is rewarded or punished, and people adjust to the reward, not to what you meant. They aren't being wicked. They're being sensible inside the rules you made. So whenever you set a rule, a bonus, a price or a penalty, ask: what is the easiest way to win under this rule? That's what you'll get.
A parent pays a child for every book finished. The intention: a love of reading. The easiest way to win: the thinnest books on the shelf, skimmed.
Check yourself
A call centre starts paying a bonus for the number of calls each agent finishes per hour. Sort the effects.
- Calls per hour go up
- Agents hurry difficult customers off the line
- Waiting time on the phone drops this month
- Unsolved problems lead to repeat calls and angrier customers
- Careful agents, who earn less bonus, start to leave
Show the answer
First-order: Calls per hour go up, Waiting time on the phone drops this month
Second-order: Agents hurry difficult customers off the line, Unsolved problems lead to repeat calls and angrier customers, Careful agents, who earn less bonus, start to leave
When the first and second effects disagree
Nice now, costly later
Skipping sleep to get more done. Putting a purchase on instalments you can barely afford. Avoiding an awkward conversation. Saying yes to everything at work. The first effect is pleasant, which is exactly why these are tempting.
Costly now, nice later
Exercise. Saving part of every payment. Giving honest feedback early. Learning a hard skill. The first effect is unpleasant, so fewer people do them, and that's why the later reward is large.
Check yourself
Tara's colleague keeps handing in sloppy work. Tara quietly fixes it herself each time, to avoid an awkward talk and keep the project on schedule. Thinking second-order, this is the choice with the best long-run result.
Show the answer
False
First order: no awkward talk, project on time. And then what? The colleague never learns there is a problem, the sloppy work continues, Tara's workload grows and so does her resentment. The uncomfortable conversation now is the costly-now, nice-later option.
Three questions to carry
- And then what? Ask it twice. Two or three steps is usually enough.
- Who will change their behaviour because of this, and how? Customers, colleagues, family, competitors, your own future self.
- How does this look in ten days, ten months and ten years? A choice that only looks good in one of the three deserves a second look.
Check yourself
Ramin manages a small sales team. To grow faster, he will pay a bonus for every new customer signed this quarter, with no other conditions. What is the most likely result?
- Nothing changes, because good staff already do their best
- Sales staff will carefully pick customers who will stay for years, since that's their job
- Sales staff will sign anyone they can, including customers who cancel or never pay
- The staff will ask for the bonus to be removed
Show the answer
Sales staff will sign anyone they can, including customers who cancel or never pay
Right. The easiest way to win under this rule is volume, so he'll get volume. If he wants customers who stay, the bonus has to depend on customers staying.
Check yourself
Match each decision to its likely second-order effect
Show the answer
- Always replying to work messages at midnight → People learn to expect answers at midnight
- Lending money to one relative, quietly → Other relatives hear about it and ask too
- Buying a bigger flat at the edge of your budget → No room left for a job change or a slow month
- Praising only the fastest worker → Others cut corners to look fast
Lesson recap
- Every decision has a first effect and then effects of that effect. Ask 'and then what?' at least twice.
- People respond to what a rule rewards, not to what you intended, so ask what the easiest way to win under it is.
- Be suspicious of choices that are nice now and costly later, and kinder to those that are costly now and nice later.
- Stop after two or three likely steps; further down the chain you are mostly guessing.