"What Then" Thinking...
Second Order Consequences Matter Quite a Lot !!!
“Failing to consider second and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.” - Ray Dalio
If you have seen the movie E.T., then you will remember a scene where Elliott sprinkles Reese pieces on the path to lure the alien from the woods to his house. And these peanut butter candies did do the trick, by bringing E.T. home and by boosting Reese’s global recognition.
Hershey’s is the owner of Reese’s brand of chocolates and they spent USD 1 million in 1982 on this product placement strategy which entailed promotion of ET over 6 weeks in exchange for the rights to use the alien in ads for Reese’s Pieces. The ad went on to triple the sales of Reese Pieces and validated the efforts of Jack Dowd, then Hershey’s Vice President for New Business Development.
What most would be unaware of is that the product placement was first offered to M&Ms from Mars (Hershey’s biggest competitor, then and even today). Steven Spielberg was turned down by the notoriously frugal and unpredictable John and Forrest Mars (controlling family), who flatly rejected the suggestion of a tie-up with their M&M’s brand. This was a mistake, a big one.
Just think of the decision-making process here #
Hershey’s went ahead with the deal as Reese’s pieces sales were lagging and they could use the opportunity from Universal Studios as a last-ditch effort to save the brand. Whereas Mars refrained from the tie-up out of fear of endorsing a movie that could bomb at the box office or tarnish the image of its colorful candies.
Thinking in this way is called ‘first-order thinking’. It focuses on solving an immediate problem, with little or no consideration of the potential consequences in the longer term. In Howard Mark’s words, "First-level thinking is simplistic and superficial, and just about everyone can do it."
What wasn’t predictable was the global recognition that would feed into the success of Reese’s Pieces and it becomes a formidable competitor to M&Ms in years to come. What Mars missed out on was stinging the sales engine of Reese’s pieces at a time when it had the best chance to kill that product completely.
I consider this miss as an expensive error from Mars because they had the box office results of Steven Spielberg as proof enough for his movie-making acumen. He had given smash hits like Jaws & Raiders of the Lost Ark, and there was a fair chance that ET too could be a box office hit. But thinking that hard about the decision would have required the Mars family to think of second-order consequences i.e. how the events might unfold in the long term.
This is exactly how many of us also make choices. We choose based on our gut feeling or hunches, only viewing the immediate payoffs, oblivious to the future ramifications of that decision. It’s like ‘I’m hungry, let me eat some chips.’ It’s just so natural an instinct, oozing of pleasure of some kind and easy to get it done with.
But the second-order thinking will require you to think hard about the choice you are salivating about. It would require you to ask yourself “what then?” e.g.
If I eat the chips, will it satisfy my hunger? If yes, for how long?
Will I feel great about the food intake or will I feel guilty?
Will that entail a workout to burn the extra calories intake?
Could that create a habit of taking the easy way out?
Will it serve my long-term goals of living healthy and full of vitality?
These may seem like a lot of questions, but all of this thinking happens in less than 30 - 120 seconds, if only you could stop everything your doing and just think about this choice hard enough.
Most won’t and hence they will land up deciding based on emotions that serve their short-term cravings or incentives. The ones thinking long term will land up reaping the benefits since there are only a few who would think that way.
Let’s look at a few examples #
Investing :
I invested in shares of Roblox yesterday @ USD 78.2991. It’s a gaming company with 43 million users and growing its revenues at 75% p.a. Since last 3 years.
The market’s been witnessing a blood bath with equity sell-offs across the Technology space. First-level thinking would go like this, “The outlook calls for low growth and rising inflation. Let’s dump growth stocks.” Second-level thinking would go like, “The outlook isn’t great, but everyone else is selling in a panic. Buy!” And that’s what I did.
Also what helps is my time horizon. I am looking at building generational wealth and hence have a decades-long investment horizon. That helps in not getting swayed by the current narratives that the media is selling.
I can’t say with certainty that my decision will have a positive outcome, but the odds are high that it could, especially if the company keeps executing as well as they have done in the past.
News :
You will be reading a lot about the Omicron variant, and it sure looks scary. But how would you know the actual story unless you don’t think of second-order consequences i.e. if cases have gone up, have there been more deaths? If the hospitalizations are on the rise, what’s the break up of these patients? Are they common people being admitted for treatment or is there something else going on?
When you dig into the data, you realize that the situation isn’t as scary as the media seems to claim or at least highlight in bold, italic, and underlined fonts for their newspapers to sell out.
Ken’s article on Jan 8th brought clarity to the puzzle of increasing hospitalizations. The most important segment for me was from Tabassum Barnagarwala who wrote “many affluent residents in Mumbai, who have tested positive for Covid-19 and don’t otherwise require hospital care, are getting admitted in private hospitals for the antibody cocktail. Civic officials said a majority of those testing positive are from residential buildings and high-rises. “This is also the section that can afford private treatment,” a medical officer said.”
Post this analysis, you feel at ease that the situation isn’t as terrible as the headlines would make us believe. This is the very reason I don’t read newspapers for years. Since everything is sensationalized to sell or attract eyeballs. Without the masala, no one is gonna read the papers. So the media publications continue dolling out 50-75 pages newspapers, filled with sensational headlines, ads, noise, and promotional material.
I rather stick to Analysts whose work I respect, independent publications like Ken who provide quality content for an annual fee, consume material directly from industry bodies or the company website itself. The only emotion I need to fight is FOMO, at least I used to. 10 + years now and missing out on constant news hasn’t affected my career a bit.
Everything around you would need your decision-making faculties to be exercised. You could stick with your first-order thinking and overweigh the easy or the obvious option, leading to suboptimal long-term outcomes. Or you could take time to weigh the second or even third-order consequences of every choice available at hand.
Let’s consider this newsletter as an example and dive deep into this decision of mine. One of my friends questioned me about the time and energy I devote on Saturdays for writing the weekly pieces. And to his mind, he could only see the expenditure of valuable resources (time & energy) with no immediate payoff, and missing out on movies or get-togethers on Saturdays.
To which I shared with him the long term consequences -
Friends with shared interests (My On Deck Writers Group)
Credibility and Reputation since my work and opinions are public, and consistently published
Personal Brand in the making that counts a lot for opportunities in the future
An effective plug in to build new relationships and strengthen old ones
Personal learnings getting cemented in my mind, compared to just reading or watching content
An opportunity to make a difference to the readers in the area of Wealth Creation
There are 3rd order consequences too for walking this path -
Opportunities for lasting friendships globally (our writers’ group is planning a get together in Europe/US hopefully this year)
Better economic opportunities in times to come
Becoming richer, wiser, and happier with time
Learning the skills of community building and personal branding
Optionality built into my career/profession
I could live inside a comfort zone and make decisions based on my liking, my preferences, my interests, my biases, and my fears. This is guaranteed to make me choose the path traveled by most, leading to average results, or not-so-exciting outcomes. Or I could set up a system wherein I question my choices and just stretch its impact on my life an hour from now, a day from now, 1 year from now, or even 10 years from now.
Cane Toads are a species of rapidly replicating poisonous toads that were introduced to Australia (amongst other places) to control agricultural pests. These animals are now considered invasive pests themselves and have wreaked havoc on wildlife in those countries.
You definitely don’t want cane toads kinda situations to be brought upon you 🤔
The only way to increase your odds of success is to think hard about the choice you are about to make. Every choice has its consequence, and that consequence has a cascading effect down the road, and that 2nd order consequence will impact things even further down the road.
Even if you can’t see the future exactly, you can attempt to make thoughtful choices instead of dopamine-laced ones.
Few habits that you can cultivate are as follows -
Question everything !!!
Is there a reasonable basis for you to think that way or is your mind playing games with you?
Have you critically evaluated the information or are you going by blind faith on the forward received just because it came from a known source?
Have you weighed the pros and cons of the choice to be made?
Is there a margin of error kept in case things don’t pan out?
Is there a higher upside and a lesser downside?
Involve Others
It could add a fresher perspective to your line of thought
You may learn something new or important
Your conviction will get tested when there are others around, and hence this would make you work harder on making your case
You can assess the impact your choice will have on others around you
Think Long Term
People with different time horizons play different games. The short-term focussed ones are vulnerable and easy to get seduced into euphoric buy decisions and panic-induced sell decisions. Stay as far as possible from them, so that you can avoid the vortex of emotional drama that ensues
Long term decisions give you the strength to go through the pain of the short term, while you can be happy about the long term outcomes in the making
“The difference in workload between first-level and second-level thinking is clearly massive, and the number of people capable of the latter is tiny compared to the number capable of the former. First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple” - Howard Marks
Success in ‘Anything’ is the antithesis of Simple !!!
So roll your dice, make your move, bite the bullet and do what needs to be done. Not what you’d like to do, not what others are doing, not what is the consensus views, but only - what needs to be done for the long term outcome you are committed to 🤝
Recommendations for the Week will be 3 very interesting Twitter threads I came across. These are powerful constructs to learn and very simple to implement in one’s own decision-making framework. You might just need to store them somewhere for repeated visits. Trust me, you would want to #
Dubai has moved to weekends on Saturdays & Sundays. We all still getting used to it but seems calmer and better, with capital markets closed globally on these days.
Wishing you all a fantastic weekend ahead and Stay Safe 👍🏻
Loved the approach... Its true that short term gain makes us loose sight of long term loss... What is the use of being experienced if we cannot put it into healthier decision-making...
Glad I stumbled across your substack... Love the Reese's pieces story ... I am actually surprised there isn't more product placement in movies & series. I would think the Netflixes & hulus of the world could print money with all the content they create.