Why can First Principles help entrepreneurs identify the root causes of systemic risk?

Let's put it this way, this is like "The Emperor's New Clothes."

Most entrepreneurs are actually making "better" clothes, for example, with more luxurious materials or newer styles. They see others selling clothes well and think, "I should also make clothes." This is "analogical thinking." The entire industry operates on this track, with the default premise being that "the emperor needs to wear clothes."

But then, an entrepreneur who thinks with first principles comes along. He won't first think about how to make clothes better; instead, like the child, he'll ask some fundamental questions:

1. Why must we make clothes for the emperor? (What is the need?) — Answer: To make him appear dignified and noble.
2. Is wearing clothes the only way to appear dignified and noble? (Is the path to fulfilling the need unique?) — Answer: Not necessarily; perhaps a cool AR light and shadow effect could also make him look impressive.
3. What is the foundation supporting the entire "clothing industry"? — Answer: It's the consensus that "the emperor must wear our kind of physical clothes."

At this point, the root of "systemic risk" is exposed: The prosperity of the entire industry is built on a fragile, unexamined consensus. What if one day, the emperor himself or the public decides that "wearing physical clothes" is outdated or unnecessary? Then the entire clothing industry, no matter how well anyone makes clothes, will instantly collapse. This is systemic risk; it's not about your clothes not looking good, but about the demand logic for "making clothes" itself changing.

So, what can first principles thinking do for you?

It helps you escape the "how to make clothes better" rat race and examine whether the act of "making clothes" itself is solid. It allows you to peel back layers of industry conventions, business models, and competitive tactics, reaching the deepest "foundation" – that is, the most fundamental user need and the physical/human laws that govern how that need is met.

When others are discussing the decoration style of this building (industry), you are already checking for cracks in the foundation. Once you discover that this foundation (e.g., a certain technological dependency, a policy permit, a user habit) is actually very unreliable, you have identified the root of systemic risk.

At this point, you have two choices:

1. Warn everyone that the foundation is about to collapse, then build a ship (a brand new business model), and when the flood (industry change) comes, bring everyone onto the ship.
2. Or, you simply find a more solid foundation and directly build a brand new, more impressive building on it, completely overturning the old world.

This is what Elon Musk does. Others think, "How can we make gasoline car engines more efficient?" He asks, "What is the essence of transportation? It's energy conversion. Is battery + electric motor a more fundamental way of energy conversion?" Thus, he saw the "systemic dependency" risk of the entire fuel vehicle industry on fossil fuels.