This scene from The Social Network stuck with me for nearly a decade - but not because of anything Jesse Eisenberg’s character does. What captivated me was how his friend & co-founder of Facebook, Eduardo Saverin, made his money.

The fact that someone could make such a counter-intuitive yet also insanely simple connection amazed me. It wasn’t until I stumbled upon Principles by Ray Dalio that it clicked - and I realised this seemingly omniscient ability is replicable.

Anyone can learn to make $300k on oil future using meteorology - all it just takes one repeated question.

Ray Dalio uses the term ‘second-order consequences’. Howard Marks calls it ‘second-level thinking’. Whatever you refer to it by, we first need to understand what that first level is…

First level thinking is ones consideration of initial, direct effect. In the Social Network context, it would be betting on oil futures based on the price of oil futures. Howard Marks uses the following example:

First-level thinking says, “The outlook calls for low growth and rising inflation. Let’s dump our stocks.”

Ray Dalio frames it like this:

the first-order consequences of exercise (pain and time spent) are commonly considered undesirable[…]

Regardless of the examples, the consensus is clear: First order thinking can be categorised as

immediate

short term

the initial results of an action

reactive

‘gut feeling’ / intuitive

Thinking fast

Second-order thinking is an attempt to get one step closer to the reality of the matter by asking one simple question:

“And then what?”

By it’s nature, second-order thinking needs to be more conscious, slow, and drawn-out. It touches on the military axiom, ‘slow is smooth, and smooth is fast’.

Howard Marks frames it as:

Second-level thinking says, “The out-look stinks, but everyone else is selling in a panic. Buy!

Ray Dalio:

The second-order consequences of exercise (better health and more attractive appearance) are desirable.

A great example of what happens when we don’t use second order thinking is the eradication of wolves in the world’s first national park - Yellowstone.

Without wolves, the deer population ballooned, leading to overgrazing, which led to aspen and Poplar trees not being able to grow. This then contributed to riverbank erosion, and water quality degradation. From there, the Beavers left Yellowstone national park, along with a whole myriad of other species. When they were reintroduced in 1995, we started to see all of these negative effects reverse. Now - we see beavers in Yellowstone.

Wolves have effectively reintroduced beavers into Yellowstone.

An example of incredibly powerful second-order thinking can be found in Lyndon B. Johnsons rise to power, which put him on the path to eventually become JFK’s Vice President. LBJ was the Senate Minority Leader in 1953, when the democratic party was factioned into two blocks - the northern democrats, and the southern democrats.

The Northerners had a firm hold over the Presidents office, whereas the southerners basically controlled the senate.

The senate tightly followed a 100 year old practice of seniority - if you had been in the senate for longer than your colleague, you had more power and influence than them.

To oversimplify, Johnson wanted influence and favour with both sides - a previously unaccomplished feat.

LBJ did this by negotiating the smallest crack in the century old wall that was the seniority policy: If there was a position contested between a senator and a more senior senator, the less senior senator could take that position only if the more senior senator already held a position, and agreed to abdicate the contested position.

Using this tiny crack in the system, Lyndon broke the whole senate open in about 2 weeks - moving dozens and dozens of senators around, every single one of them becoming indebted to Lyndon along the way.

This paved the way forward for him to become JFK’s Vice President, which then of course led to his presidency. To make this happen in such a rapid fashion, LBJ had to use some serious second-order thinking - and lose about 14 days worth of sleep.

This example is particularly complex, but exceptionally impressive - if you want to learn more about it (probably in a less confusing way than how I just described), check out this video.

Here’s where it gets really powerful, though:

Second-order thinking doesn’t just need to be limited to the consequences of your own actions. Sure, it’s a powerful tool when using it to evaluate any given next step you might take. But it’s even more powerful when evaluating the world around you. This is what Eduardo Saverin did in The Social Network that made him $300,000 over one summer, and this is how some of the greatest investors, entrepreneurs, and innovators predict the environments they’ll be operating in.

Second order thinking, when applied to the world around us, can be used to make what seem after the fact like sage or oracle-like decisions. It allows us to find the most counter-intuitive correlations - like the fact that dry counties in America actually see more alcohol-related car accidents than other counties. Doesn’t make sense at first, but then you realise that people in dry counties typically need to travel further to get to the nearest bar.

Or the classic example from World War 2, when the British RAF pilots wanted to redesign the armour on their planes. They took stock of all the bullet holes on their bombers, and made the recommendation that they armour the most heavily damaged areas. Then a man named Patrick Blackett came along and suggested the opposite - focus on areas that had no damage. Because when bombers were hit in those areas - they weren’t returning.

Second-order thinking is one of the most powerful tools you can add to your mental armoury, and it’s something that you can always hone and become better and better at. It can be used in the context of your own actions, or to find counter-intuitive correlations that allow you to outpace everyone.

Ultimately, second-order thinking is a roadmap, with the destination being one step closer to objective reality than you were before. I like to think that’s a roadmap worth following.