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  • Brendan Stec

But you never told me about the fire

"Said you'd give me light But you never told me about the fire."

—"Sara", Fleetwood Mac


You thought this note was going towards 70's soft rock?? Sorry if you got your hopes up. I included Stevie's lyrics in that song because it introduces the interesting concept of unforeseen effects, the topic of today's note. Let's check out the below story to get started. When India was still ruled by the British government, there were too many goddamn cobras on the streets of Delhi scaring the British aristocrats who lived there. Bloody hell! To address the problem and reduce the cobra population, the British government decided to reward citizens for each dead cobra they could turn in. You may have heard the phrase, “the road to hell is paved with good intentions.” This story is a great example of that concept. After the government enacted the payment-for-dead-cobra policy, the cobra population initially declined as people hunted down the snakes and claimed their rewards. But then people figured out they could make a pretty decent living by breeding cobras, slaughtering most of them for cash, and using the remaining to breed…well, more cobras. When the British government eventually caught on and eliminated the financial incentives altogether, the cobra breeders now had a bunch of worthless venomous snakes on their hands, so they tossed the cobras back onto the streets. The problem became worse than before.

Unintended consequences! The British government had only anticipated the so-called first-order effect of its policy—an initial reduction in cobras—while failing to anticipate the second and third-order effects, or how its citizens would cleverly respond to the policy. This is a painfully common pitfall in decision-making. We get all excited about the first order effects of a solution without thinking through the long-term consequences that will ripple through the system afterwards. This new policy will reduce crime. This price decrease will gain much-needed market share. This higher-paying job will make me happier. But how often do people then ask ask,

"And then what?"

Until 1978, the U.S. Forest Service's official policy was to extinguish every single naturally occurring wildfire (1). They stopped this policy, though, after realizing that the second-order, and-then-what? effect of suppressing natural wildfires is a dense buildup of highly flammable forest brush. And guess what happens when that brush catches fire? An exponentially more deadly wildfire.

First-order effects: the most immediate feelings or results of a decision Second, third, n-order effects: the longer-term effects of a decision that happen later (and people forget about...)

Let's Get Personal Last year I sprained my ankle while training for the Boston Marathon. Instead of resting for 3 weeks to let it heal, I kept running through the injury. In the immediate-term, I stayed in shape. But then I developed a stress fracture, got put into a boot, and missed 3 months of running. First and second-order effects can plague our own personal decisions, too. As investor Ray Dalio describes in his book Principles (2):

“I’ve come to see that people who overweight the first-order consequences of their decisions and ignore the effects of second-and subsequent-order consequences rarely reach their goals. This is because first-order consequences often have opposite desirabilities from second-order consequences, resulting in big mistakes in decision making.”

Most of us are somewhat aware that frequently inhaling spicy Chick-fil-A sandwiches or avoiding taxes can have some immediate benefits but potentially negative long-term, second order effects. When the accomplished weightlifter Jerzy Gregorek said, "easy choices, hard life...hard choices, easy life,” he was getting at this concept too. An early-morning gym habit won’t pay off for at least a few weeks. And taking out student loans for a *good* education won’t pay off for several years. To get ahead, we all choose to experience first-order sacrifices now—in the hopes of receiving bigger second-order payouts in the future. There are entire industries devoted to exploiting the reward pathways in our brain to steer us in the opposite direction. Manipulative social media companies, sports betting apps, cigarette manufacturers, and casinos give you first-order hedonic pleasures while slowly sucking away your time and/or money in the long-term. Ok, soap box speech over. But Dalio's right: we have to be wary of choices that inject us with an easy short-term high. What's the catch? What are the long-term, and-then-what consequences?

*Adds vodka to jar of mayonnaise* "That's a problem for future Homer. Man, I don't envy that guy." *Chugs* The Simpsons

Beyond the Individual For businesses, governments and other organizations, the and-then-what consequences can be severe. In 2016, Wells Fargo executives made the decision to put an inordinate amount of pressure on its staff to meet extremely high sales targets and quotas on its various financial products. To meet these expectations, and who knows, just keep their jobs, the employees eventually resorted to creating millions of unauthorized, fake accounts for its customers. Customers were unethically charged millions of dollars in hidden fees. In the short-term, the hardball incentives were a raging success as many employees hit their targets and profits soared. But once the scandal was later unearthed and publicized, the second-order consequences were severe. Over the last 5 years, the bank has paid over $3 billion dollars in fines and has suffered even greater unquantifiable losses in reputational damage. The executives had failed to anticipate the second-order effects of its sales program, or more specifically, how quickly its employees would respond to the higher stakes by cheating. The 19th century economist Frederic Bastiat famously wrote that “an act, a habit, an institution, a law gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause—it is seen. The others unfold in succession—they are not seen." We can think of the first-order effects of a decision as the seen, and the second-order effects and beyond as the unseen. The best decision-makers consider not only the seen, but the unseen as well. What do they do? To summarize advice from Shane Parrish at Farnam Street and Ray Dalio:

  1. They ask “and then what?” after weighing a possible scenario and consider the potential consequences of their choice a few days, months or years in the future.

  2. If the choice is a personal one, they consider the fact that the seen and the unseen typically have opposite payoffs (i.e. the decisions with a big long-term payoff require a tougher investment up front).

  3. And if the choice affects other people, they consider how those people may respond and create additional unseen consequences as well. Will employees try to find a loophole? What will competitors do?

Here's to better decisions!


References (1) Think Again, Adam Grant (p. 11) (2) Principles, Ray Dalio

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