Second Order Thinking
Contents
Trevor L Taylor, a Miami private investor, hosts Hard Truths for a Soft World, which examines technology, comfort and connection through a systematic lens, and second order thinking is a habit that lens depends on. First order thinking asks whether an action will produce the result it aims for. Second order thinking asks what happens next: how people adapt, what the action displaces and which effects arrive later and out of sight. Many of the costliest mistakes in policy, business and investing come from stopping at the first answer.
Bastiat and the seen and the unseen
The idea has an unusually clear origin. The French economic journalist Frédéric Bastiat built an essay, What Is Seen and What Is Not Seen1, around a shopkeeper whose son breaks a pane of glass. Onlookers console themselves that the glazier now has work. Bastiat’s point is that the money spent on the window would otherwise have bought something else, shoes or a book perhaps, and that loss is invisible because it never happens. As the Econlib essay on unintended consequences2 summarizes him, the bad economist confines himself to the visible effect, while the good economist takes into account both the effect that can be seen and those that must be foreseen.
Merton and the sources of surprise
A century later the sociologist Robert K. Merton gave the subject a framework. According to the same Econlib essay, his 1936 article on the unanticipated consequences of purposive social action identified five sources of surprise. The first two, and the most pervasive, were ignorance and error; the third he called the imperious immediacy of interest, a fixation on an immediate goal that crowds out attention to later effects. The New York Times obituary of Merton3 recalled how his coinages, such as the self fulfilling prophecy and role models, passed from academic writing into everyday speech. The self fulfilling prophecy is itself a second order effect: a belief that changes behavior until the belief comes true.
Incentives that bite back
The most vivid cases involve incentives. Freakonomics Radio4 retold the story behind the phrase the cobra effect: a colonial administrator in Delhi, troubled by too many cobras, offered a bounty for dead snakes, and enterprising residents began breeding cobras to collect it. The first order result, more dead cobras, was real. The second order result was more cobras.
A gentler version appears whenever an organization rewards a number. Peter Coy, writing for Bloomberg Businessweek5, traced Goodhart’s law to a remark the economist Charles Goodhart made at a conference and later admitted was meant as a humorous, throwaway line; it is now cited widely because a measure that becomes a target tends to stop measuring what it once did. Safety rules show the same dynamic. Smithsonian Magazine6 described risk compensation, the observation that as safety features are added to cars and roads, drivers feel less vulnerable and tend to take more chances.
When prevention and suppression backfire
Some second order effects take decades to appear. NPR reported7 on what fire scientists call the Smokey Bear effect. After grazing and a policy of putting out every fire removed the frequent small burns that once cleared Southwestern forests, the mountains filled with trees, grass and shrubs, which is to say fuel, and fires began burning bigger and hotter. The experts who approved the ban, one researcher told NPR, got it wrong.
Others happen almost overnight. BBC News8 explained the Streisand effect, named after the singer’s failed attempt to remove an aerial photograph that showed her clifftop home among thousands of pictures of the California coastline. The publicity helped drive hundreds of thousands of visits to a photo that few people had seen before. The attempt to hide the picture was the reason everyone saw it.
Efficiency and the rebound
Second order thinking matters most when the first order logic seems airtight. In The New Yorker9, David Owen examined the Jevons paradox, first proposed by the English economist William Stanley Jevons in the nineteenth century: making the use of a fuel more efficient can raise total consumption rather than lower it, because cheaper use invites more use. Owen noted that American refrigerators became far more efficient over several decades even as the global market for refrigeration and the world’s total energy use kept growing. The same argument resurfaced in artificial intelligence. NPR’s Planet Money10 reported that after a Chinese company showed it could build a capable chatbot at a fraction of the usual cost, Microsoft’s chief executive cited Jevons paradox to argue that cheaper computing would increase demand, not shrink it.
Practicing the habit
None of these examples required unusual intelligence to foresee; they required asking one more question. A practical routine has three parts. First, ask and then what, following the result one step past the goal. Second, ask who adapts, because people, competitors and markets respond to any change in their incentives. Third, ask what is unseen, naming the alternative that the money, time or attention would otherwise have bought, which is the idea behind opportunity cost. The habit pairs with a premortem, which imagines how a plan fails, and with capital allocation, where every commitment has consequences beyond its first return. Investors meet these patterns constantly. A rule that pays a team on quarterly figures invites Goodhart’s law; a hedge against one risk can encourage bolder bets elsewhere, much as seat belts did for drivers; and a cost saving that makes a product cheaper may raise demand enough to swamp the savings, as Jevons warned about fuel. In each case the first order arithmetic is correct and incomplete. Writing the second order story down, even in a few lines, forces the assumptions about human response into the open, where colleagues can test them.
Asked consistently, the three questions turn a decision that looks obvious into one that has actually been thought through.
