19 April 2020

Principles: Life and Work – Ray Dalio

[See summary & table of principles (public link) | private link]


People who have shared values and principles get along. People who don’t will suffer through constant misunderstandings and conflicts. Think about the people you are closest to: Are their values aligned with yours? Do you even know what their values or principles are? Too often in relationships, people’s principles aren’t clear. This is especially problematic in organizations where people need to have shared principles to be successful. [page xi]

I believe that the key to success lies in knowing how to both strive for a lot and fail well. By failing well, I mean being able to experience painful failures that provide big learnings without failing badly enough to get knocked out of the game. [page xii]

Think for yourself: 1) What do you want? 2) What is true? 3) What are you going to do about it? [page xix]

Part I: Where I’m coming from

I gradually learned that prices reflect people’s expectations, so they go up when actual results are better than expected and they go down when they are worse than expected. And most people tend to be biased by their recent experiences. [page 11]

Much as I loved the job and the people I worked with, I didn’t fit into the Shearson organization. I was too wild. For example, as a joke that now seems pretty stupid, I hired a stripper to drop her cloak while I was lecturing at a whiteboard at the California Grain & Feed Association’s annual convention. I also punched my boss in the face. Not surprisingly, I was fired.
But the brokers, their clients, and even the ones who fired me liked me and wanted to keep getting my advice. Even better, they were willing to pay me for it, so in 1975 I started Bridgewater Associates. [page 19]

My business has always been a way to get me into exotic places and allow me to meet interesting people. If I make any money from those trips, that’s just icing on the cake. [page 20]

Making money in the markets is tough. The brilliant trader and investor Bernard Baruch put it well when he said, “If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy – if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.” [page 34]

I learned a great fear of being wrong that shifted my mind-set from thinking “I’m right” to asking myself “How do I know I’m right?” And I saw clearly that the best way to answer this question is by finding other independent thinkers who are on the same mission as me and who see things differently from me. By engaging them in thoughtful disagreement, I’d be able to understand their reasoning and have them stress-test mine. That way, we can all raise our probability of being right. In other words, I just want to be right – I don’t care if the right answer comes from me. So I learned to be radically open-minded to allow others to point out what I might be missing. [page 36]

“He who lives by the crystal ball is destined to eat ground glass” is a saying I quoted a lot in those days. [page 40]

From very early on, whenever I took a position in the markets, I wrote down the criteria I used to make my decision. Then, when I closed out a trade, I could reflect on how well these criteria had worked. It occurred to me that if I wrote those criteria into formulas (now more fashionably called algorithms) and then ran historical data through them, I could test how well my rules would have worked in the past. Here’s how it worked in practice: I would start out with my intuitions as I always did, but I would express them logically, as decision-making criteria, and capture them in a systematic way, creating a mental map of what I would do in each particular situation. Then I would run historical data through the systems to see how my decision would have performed in the past and, depending upon the results, modify the decision rules appropriately. [page 40]

However, rather than blindly following the computer’s recommendations, I would have the computer work in parallel with my own analysis and then compare the two. When the computer’s decision was different from mine, I would examine why. Most of the time, it was because I had overlooked something. In those cases, the computer taught me. But sometimes I would think about some new criteria my system would’ve missed, so I would then teach the computer. [page 41]

I’ve also learned that judging people before really seeing things through their eyes stands in the way of understanding their circumstances – and that isn’t smart. I urge you to be curious enough to want to understand how the people who see things differently from you came to see them that way. You will find that interesting and invaluable, and the richer perspective you gain will help you decide what you should do. [page 50]

I believe that all organizations basically have two types of people: those who work to be part of a mission, and those who work for a paycheck. I wanted to surround myself with people who needed what I needed, which was to make sense of things for myself. I spoke frankly, and I expected those around me to speak frankly. I fought for what I thought was best, and I wanted them to do so as well. When I thought someone did something stupid, I said so and I expected them to tell me when I did something stupid. Each of us would be better for it. To me, that was what strong and productive relationships looked like. [page 52]

Making a handful of good uncorrelated bets that are balanced and leveraged well is the surest way of having a lot of upside without being exposed to unacceptable downside. [page 58]

As for our agreements with each other, the most important one was our need to do three things:
1. Put our honest thoughts out on the table,
2. Have thoughtful disagreements in which people are willing to shift their opinions as they learn, and
3. Have agreed-upon ways of deciding (e.g., voting, having clear authorities) if disagreements remain so that we can move beyond them without resentments. [page 64]

To make sure this happened, I required that virtually all our meetings be recorded and made available to everyone, with extremely rare exceptions such as when we were discussing very private matters like personal health or proprietary information about a trade or decision rule. [page 73]

Psychometric testing, Myers-Briggs assessment, and Baseball Cards. [pages 74-75]

It turns out they [Gates, Musk, Hastings, Yunus, Dorsey, etc.] have a lot in common. They are all independent thinkers who do not let anything or anyone stand in the way of achieving their audacious goals. They have very strong mental maps of how things should be done, and at the same time a willingness to test those mental maps in the world of reality and change the ways they do things to make them work better. They are extremely resilient, because their need to achieve what they envision is stronger than the pain they experience as they struggle to achieve it. Perhaps most interesting, they have a wider range of vision than most people, either because they have that vision themselves or because they know how to get it from others who can see what they can’t. All are able to see both big pictures and granular details (and levels in between) and synthesize the perspectives they gain at those different levels, whereas most people see just one or the other. They are simultaneously creative, systematic, and practical. They are assertive and open-minded at the same time. Above all, they are passionate about what they are doing, intolerant of people who work for them who aren’t excellent at what they do, and want to have a big, beneficial impact on the world. [page 95]

Part II: Life principles

1. Embrace reality and deal with it

Whatever circumstances life brings you, you will be more likely to succeed and find happiness if you take responsibility for making your decisions well instead of complaining about things being beyond your control. Psychologists call this having an “internal locus of control,” and studies consistently show that people who have it outperform those who don’t. So don’t worry about whether you like your situation or not. Life doesn’t give a damn about what you like. It’s up to you to connect what you want with what you need to do to get it and then find the courage to carry it through. [page 156]

When encountering your weaknesses you have four choices:
1. You can deny them (which is what most people do).
2. You can accept them and work at them in order to try to convert them into strengths (which might or might not work depending on your ability to change).
3. You can accept your weaknesses and find ways around them.
4. Or, you can change what you are going after. [page 160]

3. Be radically open-minded

To do this [thoughtful disagreement] well, approach the conversation in a way that conveys that you’re just trying to understand. Use questions rather than make statements. Conduct the discussion in a calm and dispassionate manner, and encourage the other person to do that as well. Remember, you are not arguing; you are openly exploring what’s true. Be reasonable and expect others to be reasonable. If you’re calm, collegial, and respectful you will do a lot better than if you are not. You’ll get better at this with practice. [page 191]

A good exercise to make sure that you are doing this well is to describe back to the person you are disagreeing with their own perspective. If they agree that you’ve got it, then you’re in good shape. I also recommend that both parties observe a “two-minute rule” in which neither interrupts the other, so they both have time to get all their thoughts out. [page 191]

3.4 Triangulate your view with believable people who are willing to disagree. [page 193]

3.5 Recognize the signs of closed-mindedness and open-mindedness that you should watch out for. It’s easy to tell an open-minded person from a closed-minded person because they act very differently. Here are some cues to tell you whether you or others are being closed-minded:
1. Closed-minded people don’t want their ideas challenged. They are typically frustrated that they can’t get the other person to agree with them instead of curious as to why the other person disagrees. They feel bad about getting something wrong and are more interested in being proven right than in asking questions and learning others’ perspectives.
Open-minded people are more curious about why there is disagreement. They are not angry when someone disagrees. They understand “that there is always the possibility that they might be wrong and that it’s worth the little bit of time it takes to consider the other person’s views in order to be sure they aren’t missing something or making a mistake.
2. Closed-minded people are more likely to make statements than ask questions. While believability entitles you to make statements in certain circumstances, truly open-minded people, even the most believable people I know, always ask a lot of questions. Nonbelievable people often tell me that their statements are actually implicit questions, though they’re phrased as low-confidence statements. While that’s sometimes true, in my experience it’s more often not.
Open-minded people genuinely believe they could be wrong; the questions that they ask are genuine. They also assess their relative believability to determine whether their primary role should be as a student, a teacher, or a peer.
3. Closed-minded people focus much more on being understood than on understanding others. When people disagree, they tend to be quicker to assume that they aren’t being understood than to consider whether they’re the ones who are not understanding the other person’s perspective.
Open-minded people always feel compelled to see things through others’ eyes.
4. Closed-minded people say things like “I could be wrong . . . but here’s my opinion.” This is a classic cue I hear all the time. It’s often a perfunctory gesture that allows people to hold their own opinion while convincing themselves that they are being open-minded. If your statement starts with “I could be wrong” or “I’m not believable,” you should probably follow it with a question and not an assertion.
Open-minded people know when to make statements and when to ask questions.
5. Closed-minded people block others from speaking. If it seems like someone isn’t leaving space for the other person in a conversation, it’s possible they are blocking. To get around blocking, enforce the “two-minute rule” I mentioned earlier.
Open-minded people are always more interested in listening than in speaking; they encourage others to voice their views.
6. Closed-minded people have trouble holding two thoughts simultaneously in their minds. They allow their own view to crowd out those of others.
Open-minded people can take in the thoughts of others without losing their ability to think well – they can hold two or more conflicting concepts in their mind and go back and forth between them to assess their relative merits.
7. Closed-minded people lack a deep sense of humility. Humility typically comes from an experience of crashing, which leads to an enlightened focus on knowing what one doesn’t know.
Open-minded people approach everything with a deep-seated fear that they may be wrong. [page 196]

4. Understand that people are wired very differently

In creating the attributes for our baseball cards, I used a combination of adjectives we already used to describe people, like “conceptual,” “reliable,” “creative,” and “determined”; the actions people took or didn’t take such as “holding others accountable” and “pushing through to results”; and terms from personality tests such as “extroverted” or “judging.” Once the cards were established, I created a process to have people evaluate each other, with the people rated highest in each dimension (e.g., “most creative”) having more weight on the ratings of other people in that dimension. People with proven track records in a certain area would get more believability, or decision-making weight, within that area. By recording these qualities in people’s Baseball Cards, others who’d never worked with them before could know what to expect from them. When people changed, their rating would change. And when they didn’t change, we were even more sure of what we could expect of them. [page 211]

Research suggests that if you stick with a behavior for approximately eighteen months, you will build a strong tendency to stick to it nearly forever. [page 221]

The four main assessments we use are the Myers-Briggs Type Indicator (MBTI), the Workplace Personality Inventory, the Team Dimensions Profile, and Stratified Systems Theory. [page 226]

Some attributes: introversion vs. extroversion, intuiting vs. sensing, thinking vs. feeling, planning vs. perceiving, creators vs. refiners vs. advancers vs. executors vs. flexors, focusing on tasks vs. focusing on goals. [page 226]

Putting it all together [pages 266-9]

In Life Principles, I’ve explained some principles that helped me do both of these things. I believe that because the same kinds of things happen over and over again, a relatively few well-thought-out principles will allow you to deal with just about anything that reality throws at you. Where you get these principles from doesn’t matter as much as having them and using them consistently—and that you never stop refining and improving them.

To acquire principles that work, it’s essential that you embrace reality and deal with it well. Don’t fall into the common trap of wishing that reality worked differently than it does or that your own realities were different. Instead, embrace your realities and deal with them effectively. After all, making the most of your circumstances is what life is all about. This includes being transparent with your thoughts and open-mindedly accepting the “feedback of others. Doing so will dramatically increase your learning.

Along your journey you will inevitably experience painful failures. It is important to realize that they can either be the impetus that fuels your personal evolution or they can ruin you, depending on how you react to them. I believe that evolution is the greatest force in the universe and that we all evolve in basically the same way. Conceptually, it looks like a series of loops that either lead upward toward constant improvement or remain flat or even trend downward toward ruin. You will determine what your own loops look like.

Your evolutionary process can be described as a 5-Step Process for getting what you want. It consists of setting goals, identifying and not tolerating problems, diagnosing problems, coming up with designs to get around them, and then doing the tasks required. The important thing to remember is that no one can do all the steps well, but that it’s possible to rely on others to help. Different people with different abilities working well together create the most powerful machines to produce achievements.

If you’re willing to confront reality, accept the pain that comes with doing so, and follow the 5-Step Process to drive yourself toward your goals, you’re on the path to success. Yet most people fail to do this because they hold on to bad opinions that could easily be rectified by going above themselves to objectively look down at their situation and weigh what they and others think about it. It’s for that reason I believe you must be radically open-minded.

Our biggest barriers for doing this well are our ego barrier and our blind spot barrier. The ego barrier is our innate desire to be capable and have others recognize us as such. The blind spot barrier is the result of our seeing things through our own subjective lenses; both barriers can prevent us from seeing how things really are. The most important antidote for them is radical open-mindedness, which is motivated by the genuine worry that one might not be seeing one’s choices optimally. It is the ability to effectively explore different points of view and different possibilities without letting your ego or your blind spots get in your way.

Doing this well requires practicing thoughtful disagreement, which is the process of seeking out brilliant people who disagree with you in order to see things through their eyes and gain a deeper understanding. Doing this will raise your probability of making good decisions and will also give you a fabulous education. If you can learn radical open-mindedness and practice thoughtful disagreement, you’ll radically increase your learning.

Finally, being radically open-minded requires you to have an accurate self-assessment of your own and others’ strengths and weaknesses. This is where understanding something about how the brain works and the different psychometric assessments that can help you discover what your own brain is like comes in. To get the best results out of yourself and others, you must understand that people are wired very differently.

In a nutshell, learning how to make decisions in the best possible way and learning to have the courage to make them comes from a) going after what you want, b) failing and reflecting well through radical open-mindedness, and c) changing/evolving to become ever more capable and less fearful. In the final chapter of this section, Learn How to Make Decisions Effectively, I shared some more granular principles for how to do all of the above and weigh your options in specific situations to determine the right path to follow.

You can of course do all of these things alone, but if you’ve understood anything about the concept of radical open-mindedness, it should be obvious that going it alone will only take you so far. We all need others to help us triangulate and get to the best possible decisions—and to help us see our weaknesses objectively and compensate for them. More than anything else, your life is affected by the people around you and how you interact with each other.

Part III: Work principles

I learned that the more caring we gave each other, the tougher we could be on each other, and the tougher we were on each other, the better we performed and the more rewards there were for us to share. This cycle was self-reinforcing. I found that operating this way made the lows less low and the highs higher. [page 306]

As Harvard developmental psychologist Bob Kegan, who has studied Bridgewater, likes to say, in most companies people are doing two jobs: their actual job and the job of managing others’ impressions of how they’re doing their job. For us, that’s terrible. We’ve found that bringing everything to the surface 1) removes the need to try to look good and 2) eliminates time required to guess what people are thinking. In doing so, it creates more meaningful work and more meaningful relationships. [page 311]

1. Trust in Radical Truth and Radical Transparency

Radical transparency isn’t the same as total transparency. [page 331]

2. Cultivate Meaningful Work and Meaningful Relationships

Fairness and generosity are different things. If you bought two birthday gifts for two of your closest friends, and one cost more than the other, what would you say if the friend who got the cheaper gift accused you of being unfair? Probably something like, “I didn’t have to get you any gift, so stop complaining.” At Bridgewater, we are generous with people (and I am personally generous), but we feel no obligation to be measured and equal in our generosity. Generosity is good and entitlement is bad, and they can easily be confused, so be crystal clear on which is which. [page 344]

3. Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to Learn from Them

As Thomas Edison once said, “I have not failed. I’ve just found ten thousand ways that do not work.” [page 349]

You must not let your need to be right be more important than your need to find what’s true. [page 351]

4. Get and Stay in Sync

Many people mistakenly believe that papering over differences is the easiest way to keep the peace. They couldn’t be more wrong. By avoiding conflicts one avoids resolving differences. People who suppress minor conflicts tend to have much bigger conflicts later on, which can lead to separation, while people who address their mini-conflicts head on tend to have the best and the longest-lasting relationships. Thoughtful disagreement—the process of having a quality back-and-forth in an open-minded and assertive way so as to see things through each other’s eyes—is powerful, because it helps both parties see things they’ve been blind to. [page 357]

Be reasonable and expect others to be reasonable. You have a responsibility to be reasonable and considerate when you are advocating for your point of view and should never let your “lower-level you” gain control, even if the other person loses his or her temper. Their bad behavior doesn’t justify yours. If either party to a disagreement is too emotional to be logical, the conversation should be deferred. Pausing a few hours or even a few days in cases where decisions do not have to be made immediately is sometimes the best approach. [page 364]

9. Constantly Train, Test, Evaluate, and Sort People

Know that most everyone thinks that what they did, and what they are doing, is much more important than it really is. If you ask everybody in an organization what percentage of the organization’s success they’re personally responsible for, you’ll wind up with a total of about 300 percent. That’s just the reality, and it shows why you must be precise in attributing specific results to specific people’s actions. Otherwise, you’ll never know who is responsible for what—and even worse, you may make the mistake of believing people who wrongly claim to be behind great accomplishments. [page 427]

Evaluate employees with the same rigor as you evaluate job candidates. I find it puzzling that interviewers freely and confidently criticize job candidates without knowing them well but won’t criticize employees for similar weaknesses even though they have more evidence. That is because they view criticism as harmful and feel more protective of a fellow employee than they do of an outsider. If you believe that truth is best for everyone, then you should see why this is a mistake, and why frank and ongoing evaluations are so important. [page 438]

11. Perceive and Don’t Tolerate Problems

Understand that problems with good, planned solutions in place are completely different from those without such solutions. Unidentified problems are the worst; identified problems without planned solutions are better, but worse for morale; identified problems with a good planned solution are better still; and solved problems are best. It’s really important to know which category a problem belongs to. The metrics you use to track the progress of your solution should be so clear and intuitive that they are obvious extensions of the plan. [page 480]

13. Design Improvements to Your Machine to Get Around Your Problems

Use “double-do” rather than “double-check” to make sure mission-critical tasks are done correctly. Double-checking has a much higher rate of errors than double-doing, which is having two different people do the same task so that they produce two independent answers. This not only ensures better answers but will allow you to see the differences in people’s performance and abilities. I use double-do’s in critical areas such as finance, where large amounts of money are at risk. And because an audit is only as effective as the auditor is knowledgeable, remember that a good double-check can only be done by someone capable of double-doing. If the person double-checking the work isn’t capable of doing the work himself, how could he possibly evaluate it accurately? [page 506]

14. Do What You Set Out to Do

How to do more than we think we can is a puzzle we all struggle with. Other than working harder for longer hours, there are three ways to fix the problem: 1) having fewer things to do by prioritizing and saying no, 2) finding the right people to delegate to, and 3) improving your productivity. [page 522]

Don’t get frustrated. If nothing bad is happening to you now, wait a bit and it will. That is just reality. My approach to life is that it is what it is and the important thing is for me to figure out what to do about it and not spend time moaning about how I wish it were different. Winston Churchill hit the nail on the head when he said, “Success consists of going from failure to failure without loss of enthusiasm.” You will come to enjoy this process of careening between success and failure because it will determine your trajectory. It makes no sense to get frustrated when there’s so much that you can do, and when life offers so many things to savor. [page 522]

Appendix: Tools & Protocols

Coach: platform populated with a library of common situations, or “ones of those” (e.g., disagreeing with an assessment someone made, someone lied or did something unethical, etc.), which are linked to the relevant principles to help people handle them. As people use Coach, they give feedback on the quality of advice it provides, essentially coaching the Coach so that it can deliver better and better advice.

Dot Collector: app used in meetings that allows people to express their thoughts (dots: positive or negative) and see others’ thoughts in real time, and then helps them collectively reach an idea-meritocratic decision (believability-weighted voting).

Baseball Cards: presenting a person’s strengths and weaknesses and the evidence behind them; useful in meetings, where they allow people to assess the qualities of whoever is expressing a point of view to determine the merit of that opinion.

Issue Log: tool for recording our mistakes and learning from them. Anything that goes wrong must be “issue logged” with the severity of the issue and who is responsible for it specified, so that it’s easy to sort through most problems. Issue logs also provide paths for diagnosing problems and the information pertaining to them. In that way, they also provide effective metrics of performance, as they allow you to measure the numbers and types of problems coming up (and identify the people who are contributing to them and fixing them).

Pain Button: the app is designed to let people record the emotions they are feeling (anger, disappointment, frustration, etc.) as they feel them and then come back at a later time to reflect on them using guided reflection questions. The tool prompts the people who experienced the pain to specify what they will do to deal with that situation, so that the pain is mitigated in the future. There is a part of the app that shows the frequency of the pain and the causes of the pain and whether the actions were followed through and productive.

Dispute Resolver: asks a series of questions used to guide the people through the resolution process. One of its features is that it locates believable people who can help determine whether a disagreement is worth taking up at a higher management level.

Daily Update Tool: direct reports to take fifteen minutes to write a brief email of what they did that day, the issues pertaining to them, and their reflections. It provides valuable information for taking the daily pulse of what’s going on (morale, workloads, specific issues, who is doing what, etc.).

Contract Tool: app that lets people make and monitor their commitments to each other.

Process Flow Diagram: helps visualize the organization as a machine, made in a way that allows you to both see things simply at a high level and drop down to lower levels of detail as needed.

Policy and Procedure Manuals: living document in which the organization’s learning is codified.

Metrics: 1) know what goal your business is achieving, 2) understand the process for getting to the goal (your “machine” with its people and design), 3) identify the key parts in the process that are the best places to measure, so you know how your machine is working to achieve that goal, and 4) explore how to create levers, tied to those key metrics, that allow you to adjust your process and change your outcomes.