Opinion: Donald Trump and the second order thinking

You must have heard what Donald Trump has been doing over the past few weeks or from the time he became US President i.e. taking crazy decisions in the name of 'Let's make America great again'. We understand that he wants to help the steel and aluminum industry, and therefore he's announced plans for protective tariffs, claiming that "Trade wars are good and easy to win". He is also correct when he says that this has been a problem for decades.

However, while he has the right intentions and he took the decision which also looks right as well, yet he made the mistake which most of us do by 'thinking only at the first level'.

First level thinking talks about not diving deeper into the issues and not understanding the implications of our actions but taking the decisions on their face value. We will talk more about first order thinking, but let's first talk about 'US's tryst with Protectionism'.

Let's go back to the Second World War. During that era the US used to produce three-fourth of the steel worldwide and it was felt that the same situation will continue for a long time. However, after the World War, the US kept working with its old technologies and Europe & other countries moved to newer technologies which were 50 per cent cheaper than that employed by the US.

In 1959, the Congress felt that the US is losing its dominance and called for a meeting of all the big steel barons who said, "We have examined the production capabilities of other countries though they don't match up with the capabilities of the US firm."

In 1960s they finally realised their mistake, but were too late as the countries from Europe and other parts of the world had started dominating the steel space. But, there is a twist in the story. In the 1960s, a man named Ken Iverson started a steel business that became Nucor. Iverson started making steel using the electric arc process, building the first American facility in 1969. It began growing at an exponential rate, competing rather effectively with foreign producers, to say nothing of other American producers.

As other steel producers begged for protectionist policy, Iverson mocked the idea. In an interview in 1986, Iverson noted that protectionist measures already instituted hadn't had the desired effect. "As soon as prices began to rise and the steel companies began to be profitable, they stopped modernising," he said. "It's only under intense competitive pressure - both internally from the mini-mills, and externally from the Japanese and the Koreans - that the big steel companies have been forced to modernise."

Nucor has since become the nation's largest domestic steel producer. Yet, it has started to act like the Big Old Steel boys of US. After Trump announced the tariff, Nucor's CEO vigorously applauded the move, claiming it was long overdue.

But before Nucor joins the protectionist parade, it might want to recall the words of Iverson, who died in 2002, when his company was on the way to the top: "Unless you're under intense competitive pressure and it becomes a question of the survival of the business to do it, you're just going to lapse back into your old ways. There's no other answer."

The moral of the story is that if Trump had gone a bit deeper into the issue and looked at the trade restrictions imposed by his predecessors George W Bush and Barack Obama, he would have realised that trade restrictions end up doing more harm than good. Lightly informed economic adventurism by the US President is not good for the US and it is not good for the world.

Coming back to the second-order thinking, Howard Marks explains the concept as "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 favourable, meaning the stock will go up'. Second-level thinking is deep, complex and convoluted."

Second-order thinkers take into account a lot of what we put into our decision journals. Things like what are the key variables and how do they interact? Where is the leverage? And if I take this action, what happens next?

First-order thinkers look for things that are simple, easy, and defendable. They fail to realise that they are dealing with complex systems, or if they do realise it, they mistake cause-and-effect relationships. They are incapable of thinking in terms of second and subsequent steps. And, more fundamentally, they are generally unaware of the need to think in terms of second steps.

Second-order thinkers, on the other hand, think in terms of interactions, time, and system dynamics. They are aware of iatrogenics (when a treatment causes more harm than benefit) and our bias toward intervention.

First-level thinkers all look alike. They think the same way other first-level thinkers do, and they usually reach the same conclusions. This is where things get interesting. Extraordinary performance comes from being different. It must be that way. Of course, below average performance comes from being different, too - on the downside. But the road to out-thinking people can't come from first-order thinking. It must come from second-order thinking.

So next time you need to think about something, do one of two things: First, start digging below the surface of people's opinions and ask them why they think what they think. And second, ask them to take the other side of the argument.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)