The old Yiddish proverb (“Der mentsh trakht un got lakht”) puts it really well: “We plan and God laughs.” John Lennon had his own iteration.
Life is what happens to you While you’re busy making other plans
Life got in the way last week and God laughed a lot, so I didn’t get to TBL. Sorry ‘bout that.
Nobel laureate and long-time University of Chicago economist Robert Lucas died Monday at age 85. Lucas popularized the inclusion of rational expectations in macroeconomics and introduced what became known as the “Lucas critique” – the idea that policymakers should engage in second order thinking to consider how a given decision will influence individuals’ behavior when modeling the effects of that decision.
This week’s TBL is about second order thinking, what my late father-in-law called “a second degree of subtlety.” Because there can be any number of levels – not just two – it’s sometimes called k-level thinking.
Before going further, I encourage you to play the second order thinking game here. How I went about it, and how I did, is described in the Totally Worth It section below.
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Second Order Thinking
“If it ain’t broke, don’t fix it.”
Much of the time, we humans struggle with leaving well enough alone. Because essentially everything can be improved, we frequently set out to do so, forgetting that essentially everything can also be made worse. A lot worse.
The laws of cause and effect are relentless. Every action has consequences, and each consequence has further consequences. Thus, every change made to a complex system will have second order effects, which may affect (and almost always does affect) the system’s functionality in surprising and unexpected ways.
Global economies are profoundly complex and complex adaptive systems are intrinsically and unavoidably prone to catastrophe, both large and small. They are unstable and fragile – at the border of stability and chaos. Thus, systems fail, storms intensify, and markets crash.
Schools don’t teach it. But children quickly learn from stories that every choice brings unintended consequences. The teenager in the horror movie who decides to hide in the root cellar is going to die. Badly. Perhaps worse, these failures – and they are most often failures, although sometimes we pick up a nickel in front of the steamroller – are inherently immune to prediction.
Adam Gopnik provides the lesson.
“What history actually shows is that nothing works out as planned, and that everything has unintentional consequences. History doesn’t show that we should never go to war – sometimes there’s no better alternative. But it does show that the results are entirely uncontrollable, and that we are far more likely to be made by history than to make it. History is past, and singular, and the same year never comes round twice.”
Historians of World War I obsess over how a seemingly successful society could commit suicide on account of a wrong turn but spectacularly miss the point. Unintended consequencesshow us that we can’t control history, even when we’re making it.
Second order thinking tries to ferret out what an action’s unintended consequences might be (a premortem is a great example) and protect against them to the extent possible.
Zero order “thinking” is a random guess. Those who engage in it are stupid, lazy, disinterested, or misunderstanding.
First order thinking is our default. We engage in it when we see a problem and, usually quickly and easily (Kahneman’s “fast thinking”), hit on something to attack the problem without carefully considering the consequences of doing so.
“I’m hungry, let’s hit the buffet.”
“She’s hot, I’ll hit on her.”
“Someone is wrong on the internet.
Let Howard Marks outline it.
“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.’”
The problem was famously explained by “Chesterton’s fence” (which is also a decent argument for conservative politics).
“Do not remove a fence until you know why it was put up in the first place.”
Examples of the failure to heed this advice abound.
The U.S. armed the Mujahadeen to fight the Russians in the 1980s but ended up arming the Taliban in Afghanistan at the turn of the century to fight against us.
Braess’s paradox, which applies to all networks, was originally the observation that adding roads to a transportation network often slows down overall traffic flow through it.
Denying the results of the 2020 election and casting doubts about the nation’s voting system cost statewide Republican candidates 2.3 to 3.7 percentage points in the most recent midterm elections.
The Streisand effect, whereby attempts to suppress information draw attention to it, increases knowledge of it.
Budweiser forgot its customer base – it didn’t want to “evolve and elevate” – when it selected a “fake woman to sell fake beer.”
You get the idea.
If we don’t understand why the fence was built in the first place, we risk some catastrophic failure by taking it down (contrary to frequent popular belief, people in the past were not morons). Considering and ascertaining why the fence was put up requires second order thinking. Per Marks, it “is deep, complex and convoluted” – Kahneman’s desired “thinking slow.” Here’s an example of the convoluted part.
Robert Frost used this concept to question if and when good fences make good neighbors.
Before I built a wall I’d ask to know What I was walling in or walling out, And to whom I was like to give offense.
This idea works in both directions. For example, working out is difficult and painful – first order bad – but, over time, provides excellent and important benefits. Second order good!
Second order thinking is the practical application of the observer effect in quantum mechanics – or, perhaps, Schrödinger’s famous cat – and Ian McGilchrist’s idea that “[a]ttention changes the world.” We all change how we act when we are being watched.
We should routinely consider what happens next or simply ask: What could go wrong?
As we’ve seen, second order thinking is often well applied in popular culture.
My day job deals with second order thinking all the time in that markets are an excellent example of how higher-level thinking plays out. It’s a Keynesian Beauty Contest.
For example, the San Diego real estate market is surprisingly strong for sellers now because, counterintuitively, most prospective sellers are not offering their homes. They can read the newspaper – they think the market is historically bad. However, the regular flow of buyers (perhaps, for example, those moving into the area for a new job) is more than enough to support the current market because supply is so low. Houses are selling quickly with multiple bidders.
Sellers engaging in second order thinking have a huge advantage. Our thoughts are indeed powerful. McGilchrist outlines this idea thoughtfully.
“The whole illuminates the parts as much as the parts can illuminate the whole…. The world we experience – which is the only one we can know – is affected by the kind of attention we pay to it…. Attention is not just another ‘cognitive function’: it is… the disposition adopted by one’s consciousness towards the world. Absent, present, detached, engaged, alienated, empathic, broad or narrow, sustained or piecemeal, it therefore has the power to alter whatever it meets.”
In Israel, day care providers had a problem with parents coming late to pick up their kids – forcing teachers to stay late without getting paid for it. Some of the centers implemented a late fee to reduce tardiness. Instead, the late rate jumped. The fee became a price, giving parents “permission” to be late. Perhaps worse, when they eliminated the fee a few weeks later, the late rate at those centers didn’t go down, as the social stigma of being late had been eliminated.
Second order thinking for the “win.”
Totally Worth It
In the thinking game I linked above, the idea was to pick a number from 0 to 100, with that number representing your best guess of two-thirds of the average of all numbers chosen in the contest. I began with the assumption that zero level thinkers would average to 50. Naïve first order thinkers would guess two-thirds of 50, or 33. Since I figured that readers of The New York Times are pretty smart overall.I guessed that most of them would go at least a level further, and two-thirds of 33 is 22. Two-thirds of 22 is 15. I figured about half of the game’s players would go that far. I rounded down from 18.5 because two-thirds of 22, more precisely, is 14.67. My guess of 18 was close.
Feel free to contact me via rpseawright [at] gmail [dot] com or on Twitter (@rpseawright) and let me know what you like, what you don’t like, what you’d like to see changed, and what you’d add. Praise, condemnation, and feedback are always welcome.
Molly Worthen is a journalist and academic who has covered the evangelical world in outlets like The New York Times, Slate, and Christianity Today. She is now a professor of history at the University of North Carolina at Chapel Hill. She grew up in an entirely secular home but she somehow had an interest in religious people. She pursued a career in religious journalism and got her Ph.D. in religious history from Yale. Last week, she sat down with Collin Hansen of The Gospel Coalition via Zoom for a fascinating hour-and-a-half conversation about her life and journey. You will find the video at this link. You can find the audio podcast version anywhere you listen to podcasts: just search for “GospelBound” and “Collin Hansen.” Here is the Apple iTunes link.
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This is the best thing I read or saw last week. The ickiest. The most predictable. The most obvious. The most insane. The best analysis. The biggest mystery. Berkshire-Hathaway’s annual Buffettpalooza. Gidget. Quintessentially California. Long, but important. Swiftonomics.
This is the best thing I read or saw this week. The saddest. The stupidest. The grisliest. The ugliest. The most absurd. The best heist. Full service. Feynman. The DeSantis platform. The long, strange history of the baseball cap. Solid list, but the order is off. Accomplishment. Wealth transfer. Modern singing. RIP, Heather Armstrong. Powerful epitaph.
Please send me your nominations for this space to rpseawright [at] gmail [dot] com or via Twitter (@rpseawright).
Irish essayist Fintan O’Toole references William Butler Yeats’s “magnificently doom-laden” 1919 poem The Second Coming to offer the “Yeats Test.” You have surely heard at least parts of this poem. For example: “Things fall apart; the center cannot hold,” or “And what rough beast, its hour come round at last, slouches towards Bethlehem to be born?” Here is the Yeats test: “The proposition is simple: the more quotable Yeats seems to commentators and politicians, the worse things are.” On the other hand, a spike in quotations from another Irish poet, Seamus Heaney, such as his phrase “hope and history rhyme” (I used it here), means times feel more stable.
Before Dylan, there was Connie Converse. Then she vanished.
The TBL Spotify playlist, made up of the songs featured here, now includes over 260 songs and about 20 hours of great music. I urge you to listen in, sing along, and turn up the volume.
My ongoing thread/music and meaning project: #SongsThatMove
To those of us prone to wander, to those who are broken, to those who flee and fight in fear – which is every last lost one of us – there is a faith that offers hope. And may love have the last word. Now and forever.
Thanks for reading.
Issue 153 (May 19, 2023)
Since unintended consequences are, by definition, unexpected, it helps to make reversible decisions whenever possible. Read Jeff Bezos’ famous recitation of this idea here.
“It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”
Readers of The Financial Times are even smarter. The FT ran versions of this game for its subscribers in 1997 and in 2015. In the first version, the winning answer was 13. In 2015, it was 12. The Nash equilibrium level (the answer people would give after knowing the other players’ answers and being given infinite opportunities to change their own) is zero.
This is why I avoid macroeconomics altogether & regard forecasting as folly. 😉
Bob. Your newsletter gets more compelling very week. Thanks! You gave us a nice introduction to the super important concept of Second Order thinking, but I sure hope this week’s newsletter isn't all you’ll write about the topic. I’m a big fan of Charlie Munger - with skin in the game, as I own one share of brk.a - and his quote that “It is in the nature of things that many hard problems are best solved when they are addressed backward” is to me the essence of second order thinking. That, and “Avoiding stupidity is easier than seeking brilliance”. Please devote another week of your newsletter to Second Order thinking. Adios. Brett