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Powerful Tools For Dealing With Uncertainty with Josh Kaufman

Lace Gilger
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In this episode, we share powerful strategies for dealing with uncertainty, some of the most important tools for making better decisions, how to get more flexibility in your life, and much more with our returning guest Josh Kaufman.

Josh is a researcher and author of three bestselling books: "The Personal MBA", "The First 20 Hours", and most recently "How to Fight a Hydra: Face Your Fears, Pursue Your Ambitions, and Become the Hero You Are Destined to Be." Josh has been featured as the #1 bestselling author in Business & Money, as ranked by Amazon.com, and his website JoshKaufman.net was named one of the "Top 100 Websites for Entrepreneurs" by Forbes. His work has been featured in The New York Times, The Wall Street Journal, Forbes, Time, Wired, and much much more!

  • The future is inherently uncertain, yet people cling to models and data in the hope that it will make reality more understandable… how can we learn to THINK so that we are inherently prepared for an unpredictable and uncertain future/world?

  • Uncertainty is an ever-present fundamental part of life

  • Most people have a problematic relationship with uncertainty 

  • Instead of trying to ignore uncertainty or will it away, you can plan for it more effectively 

  • How do we more effectively deal with uncertainty? 

  • How do you handle uncertainty when making big, tough, life decisions?

  • Think of decisions in terms of permanence and impact 

  • If you wait until you have enough information to make a decision, you’ve often waited too long 

  • A lot of good decision making comes down to paying attention and gathering information, but then you to be willing to stop gathering information and take action

  • Information gathering has diminishing returns as well. 

  • “The optimal stopping problem” - when do you decide to stop and that you have enough information?

  • Exploration vs Exploitation - when should you explore vs when should you do? You always want to have some exploration component

  • “Pick the thing, do the thing, be the best in the world at the thing”

    • It’s what David Epstein called a “sampling period” in the book Range

  • "The three universal currencies"

    • Resources

    • Time

    • Flexibility 

  • Flexibility is your ability to choose what happens next. 

  • How do you increase the amount of flexibility in your life?

  • The difference between HAVING FLEXIBILITY and BEING FLEXIBLE 

  • Would you rather be a tiger or a turtle? 

  • Tigers are the actual king of the jungle.. since lions don’t live in a jungle... 

  • Being able to be resilient, to be able to operate in a wide variety of situations 

  • How do you think about systems? And why is it important to understand systems?

  • Thinking in systems helps you improve all kinds of things in your life in a reliable, repeatable, improvable way. 

  • The 5 Core Components Needed to Understand ANY Business

    • Value Creation

    • Value Delivery 

    • Marketing

    • Sales

    • Finance

  • How do you unravel thorny systems?

  • "Thinking by the clock"

  • How do you make decisions in really complex situations?

  • “Normal accidents” are a part of every system. You have to plan for things breaking down, not working, and not going right. 

  • When you try to intervene to prevent a bad thing, how do you do that without decreasing flexibility and resilience

  • The concept of “intervention bias” - it is more comfortable to do something than it is to do nothing. Sometimes the best thing to do is not to over-react, or not to do anything.

  • The idea of “Fraud Budgets” and how banks use them to handle normal accidents. 

  • Homework: Set aside 15 minutes of “Thinking by the Clock Time.” Write down something you’re thinking about, a decision you're struggling with, or a problem you’re dealing with. Think through all the systematic components around this decision for the full 15 minutes. 

    • What are the things you could do or try that would help you make a better decision?

    • What are some of the things in your environment, job, career, market, industry, etc that have an impact or effect on this, that might be contributing to your decision? 

    • Think through the chain of causality to try and find a new insight

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Episode Transcript

[00:00:04.4] ANNOUNCER: Welcome to the Science of Success, the number one evidence-based growth podcast on the internet, bringing the world's top experts right to you. Introducing your hosts, Matt Bodnar and Austin Fabel. 

[00:00:19] MB: Welcome to the Science of Success, the number one evidence-based growth podcast on the internet with more than 5 million downloads and listeners in over 100 countries. In this episode, we share powerful strategies for dealing with uncertainty. Some of the most important tools for making better decisions, how to get flexibility in your life, and much more with our returning guest, Josh Kaufman. 

Are you a fan of the show and have you been enjoying the content that we put together for you? If you have, I would love it if you signed up for our email list. We have some amazing content on there along with a really great free course that we put a ton of time into called How to Create Time For What Matters Most in Your Life. If that sounds exciting and interesting and you want a bunch of other free goodies and giveaways along with that, just go to successpodcast.com, you can sign up right on the homepage. That’s successpodcast.com. Or if you’re on your phone right now, all you have to do is text the word SMARTER to the number 44222.

In our previous episode, we discussed how to love yourself and focus on effort, not outcomes, with returning guest, Kamal Ravikant. Now, for our interview with Josh. 

[00:01:37] MB: Josh Kaufman is a researcher and author of three bestselling books; The Personal MBA, The First 20 Hours, and most recently, How to Fight a Hydra: Face Your Fears, Pursue Ambitions, and Become the Hero You Are Destined to Be. 

Josh has featured as the number one bestselling author in business and money as ranked by Amazon.com, and his website joshkaufman.net was named one of the top 100 websites for entrepreneurs by Forbes. His work has been featured in the New York Times, the Wall Street Journal, Forbes, Time and many more media outlets. 

Josh, welcome back to the Science of Success. 

[00:02:12] JK: Thanks, Matt. It’s great to be here once again. 

[00:02:15] MB: Well, I’m really excited to have you on. As I mentioned in our previous interview as well. I mean, Personal MBA is one of my all-time favorite books, and I have an insane amount of underlines and highlights and it’s 10-years-old at this point. So it’s fallen apart.

[00:02:28] JK: It has. It’s been out for 10 years. And yeah, the binding or the spine only lasts so long. So high time for you to get a new edition.

[00:02:36] MB: That’s right. That’s right. Well, it’s funny, I was rereading my old yellow-paged copy, and one of the things that really jumped out of me that you talk about a ton, and now more than ever is so relevant, was this notion that uncertainty is an inherent part of reality. And there’s such an easy temptation either in the business world to cling to things like models and data and forecasts to try and take that uncertainty out of reality or even in our everyday lives to struggle through and face so much uncertainty when we’re trying to make big tough life choices. I thought your discussion about in the book was really, really important. And you threated it throughout a number of different elements in the book. So I really just wanted to hear your thoughts around uncertainty and how we should really interact with it. 

[00:03:27] JK: Sure. What a good year to talk about uncertainty. I don’t know anyone who in their 2020 things to do plan has respond to global pandemic on their to do list, right? The fundamental nature of reality is that things that affect us, what we want to do, how we go about our lives, how we organize our time and energy and attention. A lot of the things that are going to impact how you actually do that are factors of the outside world that you both don’t know and sometimes can’t anticipate in advance and you can’t control.

So, I think anyone on the face of the earth would say, “Okay, pandemic, let’s stop right now. I have things to do.” If we had wishes from a genie, and I think pretty much everyone would use one of those to get rid of this, but we can't. And so uncertainty, just knowing that that is an ever-present fundamental part of life, it's something that's always going to be there. It's something you're always going to have to deal with. That is a very useful organizing concept for your mind. So instead of fighting it, instead of trying to find some situation where you know exactly what's going to happen, you know exactly what you're going to, you know exactly how you're going to respond. Just knowing that uncertainty is present and a factor in everything helps you make better decisions, because instead of trying to ignore it or will it away, you can plan for it. You can change the way that you go about your daily life or organize the structure of your business in order to account for a certain amount of uncertainty. The plans that you make when you account for uncertainty will be completely different. That the plans that you make hoping that something unexpected is not going to get in the way. 

[00:05:24] MB: And what would be an example of how to start accounting for uncertainty? How to start transforming your thinking to understand the fact that uncertainty is an inherent component of reality? 

[00:05:37] JK: Yeah. I think let's do a personal one, and then a business analog. If you read very much personal finance, you'll find the idea of an emergency fund coming up over and over again, right? So you should have a reserve that is set aside for what if you lose your job? What if you get sick? What if you're on disability? What if you get in a car accident and all of a sudden you have to pay for a vehicle or replace something? All of the things that could come up in the course of your personal financial life, having a stock of cash, having a buffer set aside in advance of those things. So you don't exactly know what you're going to use it on. You hope that you’ll never use it. But having something set aside in advance makes those inevitable bumps a lot easier to deal with. 

The same goes on the business planning side. I have what I call a strategic reserve, which is kind of a broader sense of an emergency fund, but it also covers opportunities. So what if you in the course of business find a potentially really good way to market your business but you would need to have some funds set aside in order to do that? That's what the strategic reserve is for. The same thing goes for things like lines of credit. You can open up lines of credit and not use them. Just have them sitting, waiting to be used when the situation is right. 

And so it just planning with that in mind and making sure that you have some built-in inflexibility in both your personal decisions and your business decisions makes these inevitable bumps, and sometimes they're very big bumps, much, much easier to handle. 

[00:07:22] MB: There's two things I want to break down from that. One, I want to dig more into flexibility. But before we jump into that, the other component of this is there is also a piece of decision-making that involves a comfort with uncertainty that is really, really important. And probably the biggest question I get from listeners on the Science of Success is some variation or some form of, “Hey, I have this big life choice I want to make,” whether it's starting a company, or writing a book, or quitting your job, or finding the person you love, or whatever it is, and I don't know how to make that decision. 

And to me, when I really break it down, it comes back to you have to get comfortable acting under conditions of uncertainty. You have to be able to handle an outcome where you won't know necessarily for certain the way things are going to go. And when I look at people who are really successful, those people almost always have the ability to take action in the face of uncertainty. Whereas when I look at people who are stuck, a lot of times they’re stuck because they don't know what to do because they don't know how to handle uncertainty. 

[00:08:31] JK: Yeah. I think a lot of that goes down to for the decision or the situation. How permanent is this? So, you can think of decisions in terms of permanence and impact. So, is this a very important decision that is going to change a lot of things where that a lot of other subsequent things rely on? Or is this something that is more in the experimental category? Could you try something and see what happens? It's much easier to be experimental with things that the impact is relatively low and they’re relatively impermanent, right? So this is where the whole idea of exploration and exploitation comes from. 

So, for a lot of decisions – And pretty much all of learning falls into this category. You can just try a bunch of different things, gather information, do something and see if it works. And if it works, we you keep doing it. And if it doesn't work, you stop doing that and you start doing something else. 

So, some of the learning or skill acquisition or trying to figure out what the best approach is on the strategy side, those are the things that you can be more experimental and worry a little bit less about not getting it right the first time. There are some decisions that have huge impacts and somewhat permanent impacts. I think it was, if I remember correctly, Charlie Monger, who said one of the most important decisions that you make in your life is the choice of a long-term relationship, or a spouse. There are a lot of really negative things that can happen long-term if you do not choose wisely in that regard.

And so there are a lot of decisions in that particular category where it really make sense to take a step back, understand that, yeah, this is this is a big decision. This is a decision that is permanent or semi-permanent, and really think through, look at options and try to build as much information and data gathering into the process before you make that decision. Then gathering process after the decision has already been made, if that makes sense. 

It's one of those things that a certain amount of flexibility in approach, and this has to do with your personal flexibility in terms of what you're willing to do an experiment with and how you gather information. But also, your flexibility in terms of looking at options, collecting information, doing all the things that you can do so when you make that permanent decision, it is as likely as possible or as likely without perfect knowledge as you can make it. Does that make sense?

[00:11:20] MB: Yeah. That definitely make sense. And it makes me think of another thing you talk about it in the book, which is this notion of making a decision. And I think the quote originally was from Colin Powell, but a lot of people have said something similar to this, which is if you wait to make a decision until you have 100% of the information you want, you've waited too long to make that decision. 

[00:11:39] JK: That's where the decision-making is an art, right? Because there's no personal heads-up display that tells you, “You have collected 80% of the information that you need to make this decision.” You're doing this by intuition and feel a lot of the time, which depending on your personal comfort with both risk and analysis can be very uncomfortable at certain times, right? 

I think it's one of those things that there are – If you pay attention. And I think a lot of good decision-making comes down to paying attention to the information that is in your environment and the types of information that you could gather with a little bit of effort or with a little bit of work. Going through and gathering that information is valuable and worthwhile. Spending some time and energy, collecting things that will help you or inform you and what you're trying to do, always a good use of time. And at a certain point, information has diminishing returns too. 

There's actually a famous problem. There's a great book called Algorithms to Live By, which talks about the intersection of some concepts in computer science with day-to-day life. One of the problems that they talk about is what's called the optimal stopping problem. When you're going through and gathering information, at what point do you decide, “All right. I have enough and I don't need to collect information now. I need to act.” Because collecting information forever is called a different thing. That's procrastination. 

The optimal stopping problem is always you collect up to a certain point, and then based on that data or information, you jump and you make the best decision that you can at that point. And the other algorithm that is firmly in this camp is exploration and exploitation. So you explore for a while. You gather information. And then at a certain point, as you gather information, you're going to get a direction of the thing that looks like it's going to be the best for you, whatever that happens to be in the circumstances.

And so you spend less time exploring and you spend more time doing the thing that you think is best for you at that time. But the difference is that there's always an exploration component involved. You're always out collecting additional information, because what you're doing right now may not be the optimal strategy. There may be something better, different for you. 

It's interesting holding those two ways of seeing the world in mind. Like there are some situations that require a single yes or no, go, no go, sort of decision. And there are some things that you can do something that works for you for a period of time, but then you're also always looking at the environment and looking for opportunities to make what you're doing just a little bit better. 

[00:14:33] MB: I want to dig into. To tell me a little bit more about – You’ve touched on earlier as well. This idea of exploration versus exploitation and how do you think about striking the right balance between those two things. 

[00:14:46] JK: Yeah. Let's make this a little bit more tangible or concrete. Most of us in the exploration of our careers, we rely on skills to do what we do. But then, in the course of your career, what is the set of skills or what is the set of capabilities that is going to work best for you both in terms of having a successful career in the sense of earning wealth, advancing in whatever way that you wish to advance, all of those things. But also in your personal enjoyment? What are the things that you are going to go to work every day and enjoy the experience of spending a third to a half of your life doing this thing that you're doing? 

So when it comes to our careers, I think most of us kind of defaults to exploitation mode. That has a lot to do with how we view specialization versus generalization and work in culture. It seems like specialization. If you want to be the best in the world at something or you want to establish a very firm reputation as being great in one specific area, then, fundamentally, that strategy is exploitation, right? You find one thing, the thing for you, and you get as good at that particular thing as you can. 

I think what's really interesting looking at the market and the economy and careers in general is that there is an enormous amount of opportunity in exploration in trying different things. Things that you don't yet know how to do. Things that might, if you figured out how to do them, presents a competitive advantage or make you unique in some way shape or form. 

I have a good friend. He's the Chief Technical Officer for a company, a software company. And one of the things that he figured out would make him unique. I should say not Chief Technical Officer. Chief Operations Officer. It’s a very different thing. So he's the COO of this company. And being able to know enough of this language called SQL, which is how you get information from databases, he can go in and he can grab his own information whenever he wants versus relying on his staff to do it for him. That's not necessarily a thing that a lot of people trying to become really good COOs would decide to invest in. But because he has chosen to invest in it, it gives him more flexibility. It gives him something that he can use in the day-to-day pursuit of his job in a way that makes him better at this thing that he's decided he wants to get really good at.

Most of us, when we’re thinking about this sort of thing, defaults to the exploitation side of the spectrum when I think most of us would benefit a great deal from way more exploration than were used to investing. 

[00:17:44] MB: It’s such a great point, and it reminds me of – I don’t know if you’re read David Epstein's book Range, but talks about a similar – The idea of being a multidisciplinary thinker of borrowing and bringing ideas from lots of different disciplines and fields and how much power you can really create, and novel solutions, interesting ideas, connecting the dots. There are so many ways that, really, conceiving of things in a little bit broader fashion and spending a little more time exploring can create a lot of value.

[00:18:13] JK: Yeah. And Range is a wonderful book, and David is a great person. I had the privilege to meet him this past year. It's really funny that – And David talks about this in the book. There's been this sense of just pick the thing and do the thing and be the best in the world at the thing. And that's the way to success. But when you look at how people who eventually get there actually live their lives. There's an enormous amount of exploration that happens before they find the thing that really works for them. 

And in the same way, being able to combine different areas of knowledge to combine different skills or different practices, those are the things that really give you a uniqueness, an advantage, a way of seeing the world or doing things that is unique and valuable and allows you to accomplish things that other people really haven't been able to accomplish. You can see that right now. We are talking a little bit about software. But there are enormous number of industries that are not very automated right now. They handle things in terms of, let’s say, Excel spreadsheets flying back and forth. You don’t have to be an expert in programming or automation to understand the benefits of learning how to do something like that and doing just a little bit of it. 

You can see a lot of the companies that are winning right now are the ones that are able to take a very sometimes old industries stuck in its ways, and then use some of these new tools in a way that allows them to be faster, or cheaper, or more efficient. Those are all huge advantages, and all it takes is being able to see the world not just through a single specialized worldview or skillset, but being able to combine multiple skillsets in a way that lets you create something new. 

[00:20:11] MB: And that really brings us back to, in many ways, the importance of being flexible. Tell me a little bit more about how important flexibility is and how we can start to integrate that into our lives. 

[00:20:23] JK: Yes. In the personal MBA, I have an idea called the three universal currencies, which is resources. What we usually think of money, stuff, things like that. Time is a resource, and flexibility is also resource, which most people don't really think about flexibility as a thing that is valuable. But what's really interesting is that you can very often trade one of these universal currencies for more of the other. The classic example of this is let's say you're working a full-time job and you would like to have the ability to go do something else from 3 to 6 every day, or take Fridays off, for example. So you can choose to have a conversation with the folks who are employing you and you can very likely trade some of the wages or salary that you're making for an additional bit of flexibility in terms of this time off that you would like, however that works. You're able to trade resources for time and flexibility in a way that is almost a one-to-one sort of thing. 

So, flexibility is just defining it really quick. It's your ability to choose what happens next. You’re ability to figure out of all of the available options that are open to me, which is the one that is going to work best in this environment, in this situation with the facts that I have at my disposal? And that type of flexibility is very, very valuable. You can think of a lack of flexibility as making you very rigid and very brittle. And so when something unexpected happens, you don't necessarily have the wherewithal to respond to that situation in the same way as if you had more options available or open to you, if that makes sense. 

Having flexibility is one of those things that feels a little bit nebulous. It's not the same thing necessarily as having dollars in the bank, right? Or having freedom or not freedom over your time. It's just having the capacity to respond in a way as uncertain events happen and as the environment or situation around you changes. 

[00:22:46] MB: And I think there's another component here too. We've been talking about this idea of having flexibility in your life, but I think there's another element which is really being flexible and in the way that you adapt and respond to different situations. And they're very interrelated, but I think there's a distinction there that's really important. And in the book you pulled out this analogy of the difference between tigers and turtles and sharing some of the importance of being flexible in the way that you respond and interact with the environment. 

[00:23:19] JK: The tigers and turtles analogy is, yeah, a really good one in this case. So, think of a tiger as a super optimized system. And when everything is going according to plan, it performs just wonderfully, okay? Tiger in the jungle going out hunting, king of the jungle, the actual king of the jungle, because lions don't live in the jungle. I’m not sure how that happened. But tigers, when everything is going well, they are super optimized hunting machines. But it's when food gets scarce or when the environment changes, when the land changes, they don't do very well. If there's not enough food, they die, because they eat some specific things. And when those things are scarce, the time of the tigers is over. 

Now turtles on the other hands, not the most exciting creatures in the animal kingdom. They’re kind of slow. They just walk around and sit in the water and eat food. But the range of environments in which a turtle can survive and thrive is huge. In fact, when the tiger comes for the turtle, the turtle has a really good chance, because it has some built-in defensiveness and flexibility to go into environments or to survive in ways that the Tiger just can't match. 

The whole idea of being able to be resilient or to be able to operate in a wide variety of different situations is a very valuable one. Sometimes you can take optimization way too far. Think of a hedge fund that is very optimized for a specific set of market conditions. And when those market conditions happen, they make money hand over fist. But when something changes, they can also lose money hand over fist. That can shift in minutes or hours.

Thinking about in planning for resilience, what can help you operate in a wide range of environments in a wide range of circumstances or prevailing conditions in the environment or the world? All of those things, they don't necessarily give you a return in the very sexy sense of like, “Wow! My bank account is huge right now.” But what they do is they allow you to operate over a wider variety of things happening in the world. And when it is a good time to shift from, for example, one market to another, one industry to another, one job to another, you have a greater degree of affordances, or options, or things that you could consider or do based on those changing circumstances.

And I think, in general, the world would be a lot better both on the business, the corporate side and on the personal side of people who have more skills, more options, more flexibility, more knowledge that can track from one industry or market to the other then being hyper-specialized in doing one specific thing, because if that specific thing changes or disappears for whatever reason, that's a really not good situation to be in. 

[00:26:39] MB: In many ways, that brings it all the way back to exploration versus exploitation and what we're talking about a minute ago. But I want to circle back. You touched a minute ago on optimization and even describe the Tiger as an optimized system. I want to broaden that perspective out and talk a little bit more about systems thinking and understanding and analyzing systems. When I recently reread Personal MBA, those last couple chapters really jumped out at me. I thought it was a great discussion of the importance of systems and how we should think about them. I know that's a really broad topic, but I'd love to introduce that concept and dig into it a little bit.

[00:27:19] JK: Yeah, sure. So systems, in general, it’s just a repeatable process that is designed to produce a particular result. And so I think it really helps. And this is one of the things that, particularly in business, there aren't a whole lot of people in business in the broadest sense that have been exposed to or know how to think about things in a systematic process oriented sort of way. Versus, by contrast, engineers. This is a way that engineers are taught and very often think about problems. What are the inputs? What are the outputs? What is the end goal? What is the purpose of this system? How can we make sure that the system produces this result in a reliable way? How can we make sure that the system doesn't break down in certain foreseeable ways? All of these things are very, very valuable to think about whether you're working in a job or you’re building your own company from the ground up. 

Systems are one of those things that as soon as you get this kind of way of seeing the world in your brain, a lot of things both make more sense and you start seeing opportunities for improving how you do things both on a personal level and how you can potentially change your job or change your company to produce whatever it is that you're producing in a much more reliable, repeatable, improvable way, because the system itself can be changed as well. 

So, yeah. It’s one of those things. It's almost the business superpower. Being able to look at the entirety of the business system and say, “Okay, these are the points of leverage that we have. And if we change this over here or this over here, we can get more of what we want and less of what we don’t.” 

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[00:29:57] MB: I think it’s worth underscoring what you touched on a minute ago, which is the idea that you don't have to be an engineer to reap a tremendous amount of value from understanding the world from a system standpoint, understanding business, understanding your job, understanding any output, any result you want to get back, and that could be across a huge array of spectrums. If you think about it in terms of the system that creates those results, there're all kinds of novel insights that you create that help you find new ways to create change. As you said, to help you discover leverage points within those systems that can be really powerful.

[00:30:36] JK: Like the way that I talk about business. So yeah, the systems section of the Personal MBA is part three of the book, but I start using it in part one of the book where I’m talking about business in general. And businesses are just systems. Every business has five parts, right? Like you create something of value, whatever that might be. Marketing is the process of attracting people's attention and making them interested in what you have to offer. Sales is the process of taking those interested people and encouraging them to get out their wallet, checkbook, credit card and give you money for that valuable thing that you've created. Value delivery is the process where you give your paying customers this valuable thing that you have promised them and that they’ve paid for. And then finance is the process of looking at your value creation, marketing, sales, and value delivery and answering two very important questions. Are we bringing in more money than we’re spending? And is it enough for us to keep going? 

When you understand those five things; value creation, marketing, sales, value delivery, finance, you understand the whole of how a business works. And the really interesting thing about looking at businesses in this like systems-oriented way is that process of understanding business applies to the venture that is just getting started in someone's garage all the way up to the largest companies in the world. They work in fundamentally the same way. 

Just being able to look at a business not as this nebulous complicated thing that makes money somehow, but being able to deconstruct it. To break it down into these systems that comprise this structure that is designed to do and optimized to do a specific thing, to have a specific result. That's where you're able to take a step back and say, “Okay, let me understand everything that we’re doing to create value. What does that look like?” Let me understand what we’re doing to market, or sell, or deliver value. And then that gives you the ability to say, “Okay. Well, what if we changed this here? Are we going to attract more prospects? What if we change this? Does that convert prospects to sales just a little bit more often?” And that's where we – Going back to our conversation of exploration versus exploitation, that's where you start experimenting. So you’ll look at all of the different processes that happen in your business, you find one and run an experiment. Just do something a little bit differently one time. Collect information. If it works, keep doing it. If it doesn't, stop doing it. And if you do that over a long enough period of time, your business becomes much, much, much better very quickly. 

[00:33:30] MB: It's so interesting that the concept of systems thinking can apply. It's almost fractal in some senses, because it can apply to such a small component of your business. It applies to your business as a whole. It applies to the economy as a whole. It applies to all human interaction in many different ways. I find that to be a really unique component. The more you can understand how systems behave, how to break them down, how to analyze them, how to understand them. As you described it earlier, it's almost a superpower that you can use to look at and evaluate things in so many different ways. 

[00:34:06] JK: Yeah, it applies to you too, right? So how do you as an individual work best? What makes you feel healthy and strong, and alert, and vibrant. What are you trying to do and what are some of the experiments that you could run in order to maybe do that a little faster, or with a little less effort, or in a little more enjoyable way? You can apply the same concept in terms of looking at the pieces of the system, identifying one to work on. Run a few experiments and collect data and see what works. Yeah. So it's one of those things that once you get the idea and the value of it in your mind, you can apply it everywhere.

[00:34:51] MB: Some other really interesting concepts that you talk about in Personal MBA that I thought were great systems thinking concepts that apply in so many different facets of life. One of them that I want to touch on is the idea of second order effects. Can you describe that a little bit and explain how those work and what they are?

[00:35:09] JK: Yeah. Second order effect is essentially what happens as a result of something else happening in the system? A happens, and then because A happens, B happens. And then because B happens, C happens. That's a third order effect. And then you can go as far down the chain as you like. So, because C happens all the way down to Z. And so second order effects are critical parts of the system, because it's a very real thing that's happening, but they're very tricky sometimes to nail down, because you're not necessarily doing something right before that effect happens. It's happening because of something else happening in the system. 

The interesting thing about complex systems is that all of the things you do have effects, and all of those things have effects, and all of those things have effects and sometimes those effects have effects on other effects. And so that's where we really kind of get into unraveling thorny systems is very complex and can take an enormous amount of time in some cases. 

But even just having the idea in your mind that second order effects exist and third order effects and forth order effects, they exist, they are real. They can often be very significant. And so being on the lookout for them makes it much more likely that you're going to be able to identify them. 

I’ll give a personal example. I have written in the past on my site that I had this very weird health problem. I was feeling tired all the time, and I didn't know why. The way to unravel something like that is to do a bunch of experiments, right? Like you form a hypothesis, you test it, you gather the information from that test, you collect the results and then you see what you want to keep doing and what you want to change. 

I did that for many years, and I finally figured out. And this is a relatively recent development. I figured out that I'm allergic to eggs. And the only reason that I was able to figure that out is because I was paying attention both to what I was doing every day, but also the second order effects. The things that I was noticing that didn't make sense, the things that would change in a weird way that I didn't expect. Keeping track of all of those things helped me figure out the hypothesis of, “Okay, there might be an input. Something that I am doing that is not necessarily having enough an effect immediately after I do it, but is having an effect a few hours, or half a day, or a few days later that is producing this specific thing that I am seeing in the world. Knowing that second order effects exist are real, are important, is the first step in being able to look for them. And then once you identify some, you can kind of work back the chain of causality to figure out how this thing is coming to be. 

[00:38:14] MB: That's a great example, and I was going ask you, because the world is essentially comprised of messy and complex systems everywhere. How do you think about – That was one example. But how do you think more broadly about how to start to break down and understand some of these things that can get so complicated?

[00:38:34] JK: It's reasonably straightforward in a lot of cases to understand the first-order effect, right? Like you do A, and then B happens immediately after, right? So what's a good metaphor? Think like a chain of dominoes. So you're not directly knocking over the last Domino by tipping over the first, but the first is starting a chain of causality that's going to lead there eventually. 

And so the biggest thing to start doing is to using this metaphor. Just try to understand that chain of dominoes from the beginning. When you take an action or when you make an intervention, what is the immediate effect of that? Track that. But then don't stop the tracking at that change, because no action has an impact in pure isolation. Everything else has an effect on everything else. 

So, this is really something that I think a lot of people, particularly in business, don't do enough, which is scheduling some time to think through a process in its entirety without getting distracted by something else. I think a lot of times in our life and in our career we say, “Okay, we have certain responsibilities. We do those things. Those things are going to result in some sort of outcome. But the ramifications of that outcome don't necessarily stop there.” 

So even just – I found it's really useful. And this seems a little weird the first time you do it. I call it thinking by the clock, which is you set a timer. Give it 5 minutes, 10 minutes. Where you think through the thing that you're trying to do and you try to follow the chain of causality as far as you can with the information that you have. So what we’re trying to do is avoid the impulse to just stop at like, “Oh, okay. I know what the effect of this is. It’s this,” but then the thinking process stops. 

So just knowing second order effects exist. They're going to appear in a system, always. Allows you to spend some extra time to think through beyond the immediate obvious first-order effects to figure out, “Okay. If this thing happens, what is the next thing in the chain? How is that going to affect this other thing over there?” 

Really, the only thing that it takes is both time to sit down and do the thinking, but also the capacity to be able to see the system as a system and to be able to understand how the different parts of the system might affect each other. 

[00:41:20] MB: I love that example, because it's almost building the muscle of thinking and building the muscle of improving your understanding of systems.

[00:41:29] JK: Yeah, totally. It really works on – Going back to our previous conversation on decisions. It really works for complex decisions too. I think a lot of us – The impulse for a lot of complex things is either avoidance. This is just too scary and complicated. I don't want to think about it. Or we kind of worry about it in the background, if that makes sense. Like we try to figure out – Or sit with something and then hope that the best answer will become obvious and clear without necessarily spending or investing time sitting down and thinking through it in a systematic way.

As a practice, just setting a timer – And I think the purpose of the timer, it really almost doesn't matter how long the timer is. The purpose of the timer is to avoid the superficial easy stopping point. It’s trying to get yourself to think beyond that threshold where you would normally stop and consider things you wouldn't otherwise consider or examine things you wouldn't otherwise examine. And the more you do that, the better decisions you make.

[00:42:44] MB: Such a great insight, and that I love how you tied it back to decision-making. One other systems concept that I want to just touch on briefly that I found really interesting was the idea of normal accidents. Tell me little bit about that. 

[00:42:57] JK: Yeah. So, normal accidents. I think I put it this way in the book. There is a long-standing universal proverb for normal accidents, and that is shit ship happens. And so, in the operation of any system, the system at some point for some reason in some way is going to break down. That is, the world is complex enough that the probability of that happening is pretty darn close to 100%.

And so there are a couple of different ways that you can response to that. You can either try to reinforce the system to add guards and checks and other systems in order to prevent this bad thing from happening ever again. And very often, that's the natural impulse, particularly when the accident or the thing that happened is really bad or severe. 

The problem is by doing that, you make the system more complex. You make it more rigid. You make it less flexible. And by doing that, you actually can increase the probability that other accidents, other bad things will happen in the future, because you’ve decreased the flexibility and the resilience of the entire system. This comes down to the art of figuring out. When you are trying to intervene to prevent a bad thing from happening, how can you do that in a way that is going to preserve the flexibility and the resilience of the system while still either preventing or giving you some advance notice that something in the system is going wrong? 

[00:44:39] MB: I love that question. That’s something I'm definitely going to start using in my own analysis of things, is when I'm intervening to prevent something bad from happening, I really have to start thinking about how can I do that in a way that doesn't decrease flexibility and resilience?

[00:44:55] JK: Yeah. The other interesting thing related to this is something called intervention bias. And this is a concept that comes from psychology. Intervention bias is the idea that it is more comfortable to do something, anything, than it is to do nothing. And because doing nothing doesn't feel like it's helping. It feels like you're kind of ignoring the problem or this thing is going to happen again and there's nothing you can do about it. 

So, just understanding that humans by nature, by psychology, want to do something even if that something is not helpful or even if it is actively making things worse, unfortunately. Having that idea in your mind can help you keep the option in your brain. It really just depends on the situation. Sometimes the best thing to do is not to overreact, to not do anything or not do anything direct. Maybe establish a check, but not build additional systems, things like that. 

I think the example that I use in the Personal MBA is the Challenger explosion that happens and NASA's response to a rocket full of astronauts blowing up. One of the things that they were very careful to do – Because you could build an entire system around this O ring that failed and caused the explosion. But by doing that, you're introducing additional failure points into the system. You might be making things worse instead of making things better. 

And so just understanding, people want to feel like they're doing something does not necessarily mean that doing something is the best thing to do. Here's another example from the world of finance. Banks have an enormous incentive to minimize the amount of fraud that they experience. Let's say something called like a checking fraud. But if they tried to get that number to zero to make sure there is absolutely no fraud, the systems that would result from that decision would actually result in them not having very many checking accounts at all. It would over constrain the system to the point where it would not work. 

So banks have something really smart. They have what's called a fraud budget, and they say, “Okay, based on the amount of deposits that we have, we are going to experience a certain amount of fraud. And as long as that fraud is within a certain boundary, it doesn't go above certain levels that would be problematic. We’re just going to plan for that in our budget.” It doesn't mean we’re not going to try to stop it. It doesn't mean that were not going to try to figure out who did it when it happens, but it means that as long as it's within these certain acceptable boundaries, we’re not going to over constrain our systems to make it go away. Which sounds kind of weird, but it's a very functional way of making sure the system continues operating even when bad things happen.

[00:48:05] MB: Yeah. Both of those are great examples and really clearly bring to the front how to think about normal accidents and integrate them into your decision-making and into your construction analysis of systems. I want to take this back to something really practical and actionable. For somebody who’s been listening to this conversation and they want to take action to concretely implement something that we've talked about today. So whether it's all the way back up to decision-making, dealing with uncertainty, exploration versus exploitation, etc., what would one action item or piece of homework be that you would give a listener to concretely take action on what we’ve discussed today?

[00:48:49] JK: Okay, let's combine a couple of the things that we’ve talked about. Let's go to the period of time thinking about something. So I want you to take a notebook and take a timer. Let's set the timer for 15 minutes. And I want you to write down some problem or something that you're trying to do that requires a decision from you. So, do A or do B. Take the notebook set the timer, and I want you to think through all of these systematic components around this decision for that period of 15 minutes and I want you to think about the idea of exploration versus exploitation, right? What are the things that you could do or try to collect new information that would better help you make this decision or move forward on this specific problem? And I want you to think about what are some of the things in your environment, in your job, in your career, in your market, in your industry that have an effect on this that might be contributing to the gravity of this decision you're trying to make. That might be contributing to some of the barriers that you're facing in making the decision and follow that chain of causality. See if there's something that you could do or something that you haven't thought about quite yet to either try as an experiment or to go out and research and collect more information in a way that will help you make this decision in the best way you can even though things are uncertain, and even though you can't be guaranteed how it's going to turn out. Just spend those few extra minutes thinking through the entirety of the problem. And I think you're going to find something that helps you make a better decision and make progress on this thing that you're stuck on. 

[00:50:52] MB: That's a great piece of advice, and I love using the exact type of strategy to help crystallize my thinking and make better decisions. And an added benefit of regularly doing something like this is, over time, you can go back and audit your thinking and see your decision process in real-time and see what your biases were. Where you were wrong, where you were right, etc.

[00:51:15] JK: Absolutely. I think a lot of times, the people who get better results as opposed to the people who don't get very good results really comes down to the amount of intentional time without distraction that they apply to the problems and barriers that they're facing. I think that people who do that on a regular basis get much better results than people who don't.

[00:51:35] MB: Great piece of advice, and very succinctly, really summing up a lot of what we've talked about today. Josh, for listeners who want to find out more about you, about your work, about everything you've got going on right now, where can they find you online?

[00:51:49] JK: Sure. That can find me at my website, joshkaufman.net. And if you're interested in more details about what we've been talking about today, these are all concepts in the Personal MBA: Master the Art of Business, which is just coming out with its 10th anniversary edition on September 1st. And you can find more information about the book. You can find examples of some of these concepts that we've been talking about on the book’s website, personalmba.com.

[00:52:17] MB: Well, Josh. Thank you so much for coming on the show, for sharing all this wisdom. It's been great to have you back on the Science of Success.

[00:52:25] JK: Matt, it is always a pleasure talking to you. Thanks so much for having me. 

[00:52:28] MB: Thank you so much for listening to the Science of Success. We created this show to help you, our listeners, master evidence-based growth. I love hearing from listeners. If you want to reach out, share your story, or just say hi, shoot me an e-mail. My e-mail is matt@successpodcast.com. That’s M-A-T-T@successpodcast.com. I’d love to hear from you and I read and respond to every single listener email.

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