Thoughts on Decision-Making: Second Order Thinking, Three Guesses Framework, and Thinking Statistically
In personal and professional pursuits, I often ask myself how I can avoid common pitfalls in decision-making and strategy. I’m not a game theorist or a psychologist, nor am I a mind-reader. In fact, my core competency is actually in finance (¯\_(ツ)_/¯), and I’m a newly-minted entrepreneur learning how to build a company from scratch.
So what can “regular” people like me and you do to try and compete? How can we train ourselves to make better decisions in business, our personal lives, and in our relationships? Trying to crack this code has slowly evolved into one of my bigger passions. Partly thanks to the work of Shane Parrish at Farnam Street, and with inspiration from other luminaries on this subject like Naval Ravikant, Charlie Munger, and Adam Grant, I’ve been able to better understand how to approach some of these issues as I work to become a better decision-maker and leader.
There are countless tools and “mental models” that I have used to think through complex problems and situations, particularly as a startup founder. These tools help me think more thoroughly about problems and key decisions to hopefully improve outcomes. I’d like to share three of my favorites: Second Order Thinking, Statistical Thinking, and Three Guesses Framework.
The first two, second order thinking and statistical thinking, derive from mathematics. Shane summarizes second order thinking well in the link above, so I won’t reprint his work here, but in short it’s a willingness to challenge one’s first conclusion and dig deeper for answers, hence the Office Space picture in our title :-).
Statistical thinking is an important part of second order thinking and requires us not to think in absolutes, but to think in distributions and probabilities. It’s understanding what it means and how to act when you feel the distribution of outcomes is skewed or the probability of success is in your favor. It’s understanding the impact of “confidence intervals.”
In the third, Three Guesses, I try to introduce a framework that incorporates a more qualitative, structured approach (I actually credit this to a Cornell University MBA course on critical thinking and strategy). In essence, don’t make any important decision without coming up with at least two alternative explanations for why a particular thing may be the way it is. Hence, “Three Guesses: A Conclusion and two Alternates.” There is no math here, just creativity and the application of prior experience to come up with potential explanations and decision paths. For those who do want a math analogy, however, consider each guess a “predicted Y”, and your experiences, skills, and research additional “training data” to improve your model. The better your experiences, skills, and research get, theoretically the better your guesses should get. Take for example, a child who is late for school. First guess is that they overslept. But how many other potentially explanations could there really be for why the child is late? Hundreds. Thousands, probably!
I hope this post can serve to spark a new thought process or introduce new ideas for anyone struggling with decision-making. If you have thoughts/comments/feedback, or just want to chat on these sorts of topics, feel free to message me on Twitter at “@nunzi46.”
Happy Thinking!
