Rowan Nijboer first and second level thinking

What separates an average investor from an outstanding one? The best investors I know all use mental models. The world is complex, and it’s easy to get lost. Mental models bring order to chaos and sharpen your thinking.

A common mental trap is first-order thinking: reacting only to the immediate effect. It’s easy and intuitive, but dangerous. Second-order thinking—considering the longer-term consequences—can save or make you a lot of money.

Take Shell, for example. If oil prices rise, Shell’s profits go up (first order). But higher prices also encourage more oil production, leading to oversupply and lower prices later (second order). So, a long-term investor benefits more from stable oil prices, even if that feels counterintuitive.

Or look at Novo Nordisk. When Trump announced lower drug prices, the stock dropped (first order). But cheaper drugs could make them more accessible, increasing sales in the long run (second order).

Consider self-driving cars. In San Francisco, fully autonomous taxis already operate at scale. Europe, however, is slow to allow them, aiming for perfect safety. But waiting for 100% safety means thousands continue to die in traffic accidents each year—a second-order effect we often ignore.

Politicians often respond to immediate emotions (first order), not long-term outcomes (second order), leading to unintended consequences.

To avoid first-order thinking, always ask: “And then what?” This habit helps you see beyond the obvious and anticipate side effects, just like a chess grandmaster who thinks many moves ahead.

As Magnus Carlsen says:

I am trying to beat the guy sitting across from me and trying to choose the moves that are most unpleasant for him and his style.

Best regards,

Rowan Nijboer