“World belongs to those who can predict second-order effects.”
“Those who are good at judgment are often great at second-order thinking.”
“The ability to be right a lot is mostly the ability to predict the second-order effects of any decision. You'll rarely see someone with good judgment with terrible anticipation."
"The difference between high-risk takers who are good or bad at it is second-order thinking."
"Reputation is the currency you get bankrupt on if you don't use your intuition to calculate risks and second-order effects of your actions."
These are all quotes from the beloved philosopher of the Indian startup ecosystem, Kunal Shah (Founder – CRED, Freecharge).
So, what does second-order thinking exactly mean? Instead of going into definitions, here are some examples of real cases where people failed to apply second-order thinking and it led to unintended, and sometimes hilarious, consequences.
1. English law in Wales set the death penalty for stealing sheep. Welshmen caught stealing sheep would claim to be making love to them. They would get a lesser penalty for bestiality. The result is that the Welshmen gained a reputation for being "sheep shaggers."
2. A college decided to ban alcohol consumption during college football games. This actually led to increased intoxication problems because fans were getting really drunk before entering the stadium.
3. A kindergarten made a rule for its students that said, "‘You have to eat whatever you touch." It led to all the children touching all the food to call dibs on it.
Washington State made it mandatory for schools to drop their room temperatures to save on electricity. This resulted in the teachers bringing their own heaters into their offices. The use of electricity actually increased.
4. In Athens in the 1980s, the government tried to limit pollution by having odd-numbered and even-numbered license plates drive on alternating days. The result was that many with an odd-number plate bought a second car with an even-numbered license plate and vice-versa. These backup cars were actually cheaper with worse emissions and pollution control. As a result, the streets stayed clogged and pollution got worse.
5. One city had an issue with loud bikes, so they installed decibel readers as a deterrent. Bikers started driving up to the machine and revved up their vehicles to see who could “win” by being the loudest. The city officials had to take the reader down.
6. Mexico introduced carpool lanes for drivers who were following the good habit of carpooling. It gave rise to a business of "passengers for hire" as people would now hire some passengers to be able to benefit from the convenience of the carpool lanes.
7. Increasing the number of roads doesn't solve traffic issues. People just buy more cars to fill up those roads again. The same thing happens with student loans. With larger student loans, universities just increase their tuition fee. This is called the Fence Paradox, something I covered in my 100 Days of MBA series on LinkedIn.
8. To control a rat infestation, French colonial rulers in Hanoi in the nineteenth century passed a law: for every dead rat handed in to the authorities, the catcher would receive a reward. Yes, many rats were destroyed, but many were also bred specially for this purpose.
9. This happened even in India when the Colonial British Empire paid money to locals for bringing in dead cobras, to reduce the population of the venomous snake. As a result, people started breeding cobras in order to kill them, bring them in, and collect money. The plan backfired so massively that we now call it the 'Cobra Effect'.
10. In 1947, when the Dead Sea scrolls were discovered, archaeologists set a finder's fee for each new parchment. Instead of lots of extra scrolls being found, they were simply torn apart to increase the reward. Similarly, in China in the nineteenth century, an incentive was offered for finding dinosaur bones. Farmers located a few on their land, broke them into pieces and cashed in.
11. A school started charging parents $5 every hour they were late to pick up their children. Late pick-ups actually increased due to this as parents now considered the school as a relatively cheap babysitting service for $5 an hour.
To summarise
For every action, there are higher-order effects that succeed it. A failure to consider those effects can lead to unintended consequences in the long run. That is why experienced entrepreneurs like Kunal always keep talking about it.
Well, now you know.
