Book Summary: Principles by Ray Dalio
Ray Dalio, who grew up in Long Island (the son of a Jazz musician), is perhaps best known for founding one of the most successful hedge funds, Bridgewater Associates. He’s a billionaire, global economic advisor, ocean researcher, and philanthropist.
Principles shares Ray Dalio’s story about the lessons and specific principles that helped guide his journey through life. While Dalio shares the principles that worked for him, above all, he encourages you to find or develop your own principles or rules for getting what you want out of life. And write down the ideas or principles you like most (perhaps on a sheet of paper, OneNote, or GoogleDrive). This way they may be easily recalled, practied and refined in the future.
Some of the principles and organizational tools shared in the book may appear unconventional by today’s standards, but they may gain widespread adoption in the future; this accounts for part of the reason you might want to pay attention to them. Further, Dalio’s approach to organizational culture shares some overlap with Reed Hasting’s approach at Netflix.
It’s worth noting this helpful (and unconventional) video Dalio published. It shows how the the US economy roughly works in 30 minutes, which many business leaders, government officials and politicians have found helpful. He also publishes free economic insights. The video may quickly give you an idea if you’re interested in more of Dalio’s ideas.
Book Outline
The book is outlined in three parts which may be read in any order: Autobiography, Life Principles, and Work Principles. The book is highly organized, so the index is a great tool to find the principles that catch your eye.
Autobiography: This section helpful for anyone unfamiliar with Dalio’s background. It takes its’ hero-journey style from Joseph Campbell’s The Hero with a Thousand Faces, which is listed as one of his favorite books. Dalio discusses his adventure through life’s challenges which led to the development of his principles (a few listed below).
Life Principles: This part lays the groundwork for Dalio’s approach to life and work. To be a decision-making ninja, this is the most important section. “Embrace reality and deal with” it is a key principle expressed along with “radical open-mindedness”. The “ego barrier”, which is just you holding yourself back, is another key idea he develops.
Work Principles: The last section takes Ray’s life lessons and applies them to Bridgewater Associates. This section is most appealing to anyone looking for ideas to build better business, sports team, or general organization. It also provides a fantastic business case study.
Part 1: Autobiography
Ray Dalio was born in Queens, NY and his father was a jazz musician. He describes himself as a poor student in high school, which he later comes to realize was due to a lack of interest, not ability. He was also plagued early on by a general problem with authority figures, which came with setbacks early on.
As he got older, he discovered previously unknown interests, including one in trading financial markets (like stocks, bonds, commodities) which captivated him. Ray ultimately evolved from a poor student in grade school to a Harvard Business School graduate.
Not long after graduating from Harvard, he founded Bridgewater Associates, but it wasn’t all smooth sailing. He details his early troubles in a story of a bad bet that nearly bankrupt the company. In Bridgewater’s early days, Ray calculated that South American countries would be unable to pay their US debts, predicting the US markets would go down as a consequence. Bridgewater placed big bets on the prediction.
The prediction turned out accurate, but it turned out the markets went up, instead of down. The bet went bad which caused nearly insurmountable losses that led to bad times times for the company. In his abyss (rock-bottom) he learned his most important life lesson, “How do I know I’m right?”. Armed with this lesson, he climbs out of the abyss and goes on to make Bridgewater the successful company it is today. He becomes a billionaire, economic advisor, and philanthropist in the process.
Part 2: Life Principles
Here are a few of the more notable principles:
Embrace Reality and Deal With it
Be radically truthful and radically open-minded in order to get a more accurate understanding of what is true. We must even be willing to face harsh realities which may seem uncomfortable. The more open-minded we are, the less likely to deceive ourselves.
For example, perhaps Fictional Frank or his loved one has an increased likelihood of having some unfortunate disease or ailment revealed by a family history. Let’s say the disease has some controllable risk factors, like diet & lifestyle, associated with it. It would be beneficial for Frank or his loved one’s quality of life to embrace this unfortunate possibility and pursue a rigorous diet plan along with an active lifestyle to reduce the unfortunate risk.
Know these Two Things get in the Way of Finding Truth
Ego barrier - With our more important ideas, folks can tend to get defensive and reinforce prior notions when confronted with opposing views. And after all, what kind of important beliefs could they really be if so easily given up at the first sign of “trouble”?!
Being confronted with different ideas may feel like an “attack”, causing defensiveness, instead of triggering reflection to figure out what might be true about the idea. The ego can act against us, and perhaps this is best thought of like an inner toddler, sometimes not acting in our best interest.
For example, around the year 2000, Blockbuster had a chance to “steal” Netflix for $50 million. The Blockbuster CEO famously rejected Reed Hastings‘ offer to purchase Netflix with this bit of hubris: “What did [Netflix] possibly have to offer that [Blockbuster] couldn’t do more effectively themselves?!”…A lot, it turns out. Blockbuster’s CEO, under-appraised what the outsider, Netflix, offered in terms of new opportunities and over-appraised what his company really brought to the table. 20 years later, Netflix is wildly successful and Blockbuster irrelevant, and it’s hard to see how ego didn’t play some role in Blockbuster’s demise.
Blind spots - These could be the flip side of our greatest strengths.
For example, if you give great trust and freedom to everyone around you, most people will love you, thrive, and perform at their best for you. Ultimately, a one or two might exploit this vulnerability to your detriment.
Or, a highly capable and independent person, may rarely seek out help, or another pair of eyes because they like their analysis more. This approach will reduce the odds of success on a few fronts because what are the odds they’re the expert on everything?
Weigh Second and Third-Order Consequences of Decisions
For example food that tastes good is often bad for you. Ray calls situations like this “one of life’s greatest tricks”. If you don’t find a way to deal the first positive first-order consequences of tasty food in favor of second-order and third-order consequences of health and well-being, you simply won’t get what you want (if that is your goal).
For example, let’s say everyone agrees that the new Ford F-150 Raptor is an awesome, practical vehicle and you need one; so you decide to buy one with a massive loan ($75k New). First order consequences gain you short term happiness, status and the jealous looks of all your coworkers. Second-order: A few months later, you no longer have the joy of starting the engine every morning, you find that no one really cares what vehicle you drive, and a big chunk of the money you were saving now goes to pay for it. Third-order: Over time, the missed savings adds up and may affect when you can buy a house, how much you can pay for your children’s education, or when you can retire.
Understand That People are Wired Very Differently
Ray attributes just as much of his success to what he’s learned about the workings of the brain as he does to his understanding of economics and investing.
Intuition vs Sensing. Seeing the forest or the trees.
When reading, a sensing person who focuses on details can be thrown off by typos such as “there” instead of “their”, while intuitive thinkers won’t even notice the mistake. An intuitive thinkers attention is focused on the context first, and details second.
A reader being thrown off by a simple spelling mistake, missing the point.
Thinking vs Feeling: Using logic or emotion.
In an office setting, a person who uses the thinking style may prefer for the group to come up with the most logical business solution. Other people who prefer feeling, may put a larger emphasis on harmony. These two separate groups of people may see different solutions to the same problem due to their different perspectives. We need both.
Appreciate the Art of Thoughtful Disagreement
Ray believes one of the greatest tragedies of mankind is holding wrong opinions in one’s head and making bad decisions from them instead of having thoughtful disagreements over them.
For example, corners of politics are riddled with this.
Triangulate Your Views With Believable People Who are Willing to Disagree.
Seek out other smart people who are believable on a certain subject, and seek out their advice or thought process. Someone is usually wrong and it pays to figure out if that someone is you.
For example, when first investing and choosing between stock and bonds through either individual stocks, mutual funds, or index funds, it pays to get it right sooner than later. Otherwise it’s like starting from behind. Asking other believable folks you know what they do could go a long way. Improving investment choices could easily be the difference between doubling investments every ten years versus every twenty years, and altering your future a bit (if that’s something you’re interested in).
Part 3: Work Principles
According to Harvard psychologist Bob Kegan, in most companies people are doing 2 jobs: their actual job and the job of managing others’ impressions of how they’re doing their job, which frequently leads to spin (unproductive-effort).
Dalio’s model for a more optimal organization improves outcomes through reducing this spin (people skewing information in self-serving ways), publicly broadcasting values, and clearing the path for employees to focus attention on outcomes instead of diverting attention to managing other people’s impressions of their performance.
For this section, I’m going to pull out some of the more interesting ideas or tools Dalio recommends for businesses and organizations. He does make it clear that there are many folks and organizations out there for whom these methods could be a bad fit.
Idea Meritocracy
The best stress-tested idea wins, regardless of where it comes from. Perhaps this is stating the obvious, but how come the best ideas lose out sometimes like the super-fast Concorde Jet or lots of Amazon jobs for New Yorkers?
In this style of organization, the best ideas can literally come from anywhere. Many organizations are top down driven (autocratic) for decision-making, which leads to blind spots. These blind spots can have a cumulative negative impact on a company’s value over time.
Algorithm or Rules-Based Decision-making
Since we are subject to biases, imperfect memories, limits in processing speed, marital strife, troubled times, underperforming fantasy leagues, etc, it helps to have a computer thinking alongside you wherever possible. And since computers are improving rapidly, the advantages from incorporating them will increase.
Turn the decision-making process into computer code, where possible, and have the person and computer work in parallel, as a team.
For example, today many sports teams have “nerds” or data guys that give the coaches and players computer generated insights to make better decisions that improve the chance of success. It’s the defensive shift in baseball, the 3-pointer in basketball, and going for it more often at mid-field on fourth-and-short in football.
Dot Collector App
Allows employees to easily give their thoughts and opinions and read those of others in a custom app. This often reveals vast differences in beliefs about the same exact topic between folks that leads to both a better understanding of others and improved decision-making.
Ray describes this as one his most enlightening experiences, because it reminds him how people are wired very differently, and this leads to individuals generating drastically different perspectives when looking at the same information.
For example, when I look at cheddar cheese, I quickly think of, and hunt for, crackers and honey. When my buddy looks at that beautiful cheddar, he sees the fat, heart disease, the chicken mill, and so on.
Believability Weighted Decision-Making
Assign believability to folks based on past decision outcomes so people who are more believable on a certain subject get more say-so. Along these lines, Jeff Bezos says, “Good leaders are right a lot”.
For example, typically if seven folks at work voted for Tom’s Super Spaghetti and four voted for Angie’s Amazing Spaghetti for dinner, prevailing wisdom says the seven would decide on dinner. With believability weighted decision-making, if the four in the minority turned out to be Spaghetti experts from Sicily and the seven in the majority were college interns, the Sicilians decide the Spaghetti.
Without gathering employees decision-making history, organizations are forced to rely on less analytical approaches when selecting their future, and so a process more prone to political interference.
Pain Button
For when radically truthful and radically transparent is too much. A button on an app that allows employees to express that everyone needs to take a step back.
Personality Tests to Match Folks to their Roles in Projects
Psychology and matching personality types to project types may become a bigger part of the future workforce. It’s a key ingredient at Bridgewater Associates.
The creative person needs the detailed person, and the detailed person needs the creative one.
It may be preferable for a creative person to help come up with the vision, while we’d want a detail-oriented person to prepare legal docs.
Recording Meetings and Being as Transparent as Possible
The goal here is to reduce amount of “spin” an office.
Employees tend to work harder when they know the rules are more fair and know second “game” is going on.
At most companies today, people have 2 jobs. Doing a good job and managing other’s impressions that they are doing a good job. The second job is a an inefficiency.
Internally Circulate and Broadcast the Organization's Values in a Very Public Way
While most companies loosely, or not at all, broadcast values, Ray advocates that we should broadcast values, which may be updated over time, to clearly broadcast values
Many companies loosely broadcast values or not at all.
Netflix, Amazon, and Berkshire Hathaway are three examples of companies where their values are well documented both internally and externally.
Now it’s up to you to decide what, if anything, ought to be done about any of this. Hope you found at least something useful in this review!
Author’s Note: Top Ray Dalio Quotes
“We’re doing something wrong today and we don’t know what that is.”
“The greatest tragedy of mankind is to not have thoughtful disagreements.”
“Imagine that in order to have a great life you have to cross a dangerous jungle, you can stay safe where you are and have an ordinary life, or you can risk crossing the jungle and have a terrific life. How would you make the choice?”
“You can scratch the car, you just can’t total it.”
“How do I know I’m right?”
“Finding out that you are wrong is even more valuable than being right, because you are learning.”
“Beware of the arrogant intellectual who comments from the stands without having played the field.”
“Your children will be illiterate if they do not know how to code or program algorithms into computers.”