1 INTRODUCTION

What is the one thing that we all do every day? There might be many things coming to your mind right now, but I would like to highlight the inescapable decision-making. Starting from what food one would like to have, to choosing one’s partner, where to invest, or where not to invest one’s money. If you think about it, even not making a decision, is a decision in itself. Therefore, I would like to dig deeper into the process that is behind every decision- thinking.

2 WHO IS HOWARD MARKS?

Howard Marks, an American investor, author, and co-founder of Oaktree Capital Management, wrote about first and second-level (also called first and second-order) thinking in his first book “The Most Important Thing” in 2011 (note that second-level thinking is different from D. Kahneman’s idea of System 1 and System 2 thinking). When setting investment strategies, Marks believes that it is crucial to understand whether a person is worrying more about the risk of losing money or the risk of losing an opportunity. In his book, he dives deeper into second-level thinking decision-making in investing, however, that can also be applied in different fields of business and, in my opinion, life in general.

3 FIRST-LEVEL THINKING

First-level thinking is simplistic, superficial, and focuses on immediate problem-solving without much consideration of the consequences. In Marks’ words: “Just about anyone can do it.” Our minds are programmed to look for the easiest solutions, especially when one is under a lot of time pressure, too high expectations, tense emotions, or lack of perspective. Therefore, it’s no wonder that many of us can find it hard to look beyond the initial resolutions. (Mind Tools 2022)

In Howard Marks’ memo to the Oaktree clients, he notes that investing is not supposed to be easy. It might be simple to achieve the average level in some fields but being above average or even excellent requires something more: “People who think it is easy to overlook substantial nuance and complexity.” One must look beyond the obvious and tap into a deeper level of exploration: second-level thinking. (Marks 2018)

4 SECOND-LEVEL THINKING

Second-level thinking or the so-called “superior insight” on events is about finding an edge that others don’t have in their thought process: thinking things that others do not, seeing things that others fail to see, as well as reacting differently. Second-level thinking is deep and complex. (Lyons 2020)

A good example mentioned in the memos: “From a hypothetical newspaper contest by John Maynard Keynes in 1936. Readers would be shown 100 photos and asked to choose the six prettiest girls, with prizes going to the readers who chose the girls other readers voted for most often. Naive entrants would try to win by picking the prettiest girls. But note that the contest would reward the readers who chose not the prettiest girls, but the most popular. Thus the road to winning would lie not in figuring out which were the prettiest, but in predicting which girls the average entrant would consider prettiest. Clearly, to do so, the winner would have to be a second-level thinker. [..] 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 the average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.” (Marks 2018)

5 PRACTICAL STEPS

The given example might sound like there has been a lot of deep and complex thinking ongoing, and the good news is that it is a skill, therefore it is something we can train. Second-level thinking is a proactive process, so here are 5 steps that can help us begin:

1. Question everything- don’t stop by making the first conclusion. Gather data, watch out for falling into the trap of confirmation bias, and use critical evaluation for any information you gather. Questioning is supposed to be a curious process, so don’t tip over to a disruptive over-analysis that prevents you from any decision-making;
2. Involve others- broaden the horizon and include other viewpoints in the decision-making process;
3. Think long-term- reach beyond immediate results and consider different circumstances as change factors;
4. Be open to options- don’t be too quick to quit on an idea. It might be that, at some time, one of the initial ideas was the right one;
5. Keep practicing- the more you practice, the easier and more natural it becomes. (Mind Tools 2022)

6 CONCLUSION

In conclusion, I would like to point out that it is not about who is a better human being, but how to be a more fruitful thinker and how one can maximize the capacity of one’s resources. First-level thinking is something most of us (if not all) do by habit. It is simply easier and quicker to be satisfied with the first conclusion. However, I believe it is through practicing second-level thinking that truly highlights the depths of our own potential to achieve more positive long-term results. Thank you for your time and feel free to comment: what’s the probability you might be more conscious of second-level thinking in your life?

References:

Lyons, J. 2020. Howard Marks Second-Level Thinking: Level Up! Read on 09.12.2022. https://www.brokenleginvesting.com/howard-marks-second-level-thinking/

Marks, H. 2018. Memo to Oaktree Clients. Read on 08.12.2022. https://www.oaktreecapital.com/docs/default-source/memos/2015-09-09-its-not-easy.pdf

Mind Tools. 2022. Howard Marks’ Second Level Thinking Skills. Read on 08.12.2022. https://www.mindtools.com/ar3obbe/howard-marks-second-level-thinking-skills