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Customers arrive and leave a Blockbuster video rental store in Bend, Ore., in 2018.RYAN BRENNECKE/The Associated Press

Sam Sivarajan holds a doctorate in behavioural finance and has led wealth management teams at several of Canada’s largest financial institutions. His latest book, Making Your Money Work: The Secrets to Financial Health, has just been published. For more information, visit samsivarajan.com.

What do companies like Blockbuster, Kodak and Firestone have in common? They were leaders in their industries, yet each of them failed to foresee changes that completely upended their market.

  • Blockbuster focused on renting DVDs, ignored the advent of streaming and went bankrupt.
  • Kodak owned the film business, had valuable patents for digital photography, yet let others capture the digital market and went bankrupt.
  • Firestone was a world leader in rubber tires, yet failed to respond adequately to the introduction of radial tires by Michelin. Firestone survived as a brand but gave up its independence when it merged with Bridgestone.

In all these cases, what was missing is the power of second-order thinking. It requires the discipline of repeatedly asking, and finding answers, to the question, “What happens next?”

Sadly, the power of second-order thinking is often not put to use.

Take, for example, the recent round of sanctions imposed on the Russian government for its invasion of Ukraine. The Group of Seven countries are suddenly, and publicly, debating reversing course on their announcement to ban financing of overseas fossil-fuel projects by the end of the year, and on softening or limiting the scope of the ban on Russian oil and gas. Why? Because Europe, and much of the rest of the world, depends on Russian oil and gas for everything from commuters driving cars, to suppliers shipping via trucks and ships, to tourists resuming flights after two years of lockdown.

What could second-order thinking for the ban on fossil-fuel financing or, for that matter, the German shutdown of coal plants, have looked like? Knowing that other sources of gas were not readily available and existing clean-energy supply would not be enough to meet demand, political leaders could have implemented their plans in a phased, multiyear approach. They could have created incentives or other measures to diversify gas sources. Note – this is not meant as a disagreement with green-energy policy or that alternative courses of action are easy to develop.

However, as John Sterman, a systems-dynamics professor at the Massachusetts Institute of Technology, said: “There are no side effects – only effects. Those we thought of in advance, the ones we like, we call the main, or intended, effects, and take credit for them. The ones we didn’t anticipate, the ones that came around and bit us in the rear – those are the ‘side effects.’ When we point to outside shocks and side effects to excuse the failure of our policies, we think we are describing a capricious and unpredictable reality. In fact, we are highlighting the limitations of our mental models.”

We need to think systematically, to think about downstream and upstream effects, to think about feedback loops. In his recent book, Upstream: How to Solve Problems Before They Happen, Dan Heath shared a story about two friends who, while walking by a river, see a child in trouble in the water. They both leap in to save the child. Coming back to shore, they see another child. After saving a few more children, one friend walks off. The second friend says, “Where are you going? There are more children that need help.” The first friend replied, “I’m going upstream to tackle the guy who’s throwing all these kids in the water.” Addressing the cause – not just the symptoms.

Failure to properly consider “side effects” is everywhere – from bank bailouts that encourage riskier financial bets because there is no longer downside, just upside, to daycare policies that introduce a late-pickup fee only to see more parents collect their kids after-hours because a favour has now become a service.

Consumers can also employ second-order thinking in their day-to-day affairs. For example, there have been reports of consumer spending sharply slowing down as inflation persists. Similarly, the seemingly limitless bidding wars in housing have now cooled off – and some buyers from earlier in the year are suffering buyers’ remorse. However, to some extent, rising inflation and rising interest rates were “side effects” that both policy-makers and consumers should have expected in their thinking.

We can’t see the future, but we can be better prepared for it. Consumers should not accept the status quo as a given, but ask what can change it? What comes next? These questions will help consumers better position themselves to deal with a changing world by looking past the immediate news and thinking through possible next actions.

As the quip often attributed to Mark Twain puts it: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

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