Principles: Life and Work
Ray Dalio

Ended: Nov. 12, 2017

Principles are fundamental truths that serve as the foundations for behavior that gets you what you want out of life. They can be applied again and again in similar situations to help you achieve your goals.
To be principled means to consistently operate with principles that can be clearly explained.
Experience taught me how invaluable it is to reflect on and write down my decision-making criteria whenever I made a decision, so I got in the habit of doing that. With time, my collection of principles became like a collection of recipes for decision making.
We believe that thoughtful, unemotional disagreement by independent thinkers can be converted into believability-weighted decision making that is smarter and more effective than the sum of its parts.
Meditation has benefited me hugely throughout my life because it produces a calm open-mindedness that allows me to think more clearly and creatively.
Over the decades since, I’ve repeatedly seen policymakers deliver such assurances immediately before currency devaluations, so I learned not to believe government policymakers when they assure you that they won’t let a currency devaluation happen. The more strongly they make those assurances, the more desperate the situation probably is, so the more likely it is that a devaluation will take place.
I believe one of the most valuable things you can do to improve your decision making is to think through your principles for making decisions, write them out in both words and computer algorithms, back-test them if possible, and use them on a real-time basis to run in parallel with your brain’s decision making.
The most important components to separate were the profits coming from the core business and those that were speculative profits and losses coming from price changes. We would do this to show them what a “risk-neutral” position would look like, which is to say, the properly hedged position one would take if one didn’t have a view of the markets. I would advise them to deviate from this position only when they wanted to speculate, which they should only do in measured ways and with full knowledge of the effects it could have on their core business.
I learned that if you work hard and creatively, you can have just about anything you want, but not everything you want. Maturity is the ability to reject good alternatives in order to pursue even better ones.
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.
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. Operating any other way would be unproductive and unethical.
The success of this approach taught me a principle that I apply to all parts of my life: 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.
Having a process that ensures problems are brought to the surface, and their root causes diagnosed, assures that continual improvements occur. For that reason I insisted that an issue log be adopted throughout Bridgewater. My rule was simple: If something went badly, you had to put it in the log, characterize its severity, and make clear who was responsible for it. If a mistake happened and you logged it, you were okay. If you didn’t log it, you would be in deep trouble. This way managers had problems brought to them, which was worlds better than having to seek them out. The error log (which we now call the issue log) was our first management tool.
When everyone can see the criteria the algorithms use and have a hand in developing them, they can all agree that the system is fair and trust the computer to look at the evidence, make the right assessments about people, and assign them the right authorities. The algorithms are essentially principles in action on a continuous basis.
While the ECB had offered loans on attractive terms to banks in an attempt to solve this issue, banks weren’t taking them up on the offer sufficiently to make a difference. I believed that things would continue to worsen unless the ECB “printed money” and pushed it into the system by buying more bonds. The move toward quantitative easing appeared obvious and necessary to me, so I visited Draghi and the ECB’s executive board to share my concerns. At the meeting, I told them why this approach would not be inflationary (because it is the level of spending, which is money plus credit, and not just the amount of money, that drives spending and inflation).
The move toward quantitative easing appeared obvious and necessary to me, so I visited Draghi and the ECB’s executive board to share my concerns. At the meeting, I told them why this approach would not be inflationary (because it is the level of spending, which is money plus credit, and not just the amount of money, that drives spending and inflation).
also gave him The Lessons of History, a 104-page distillation of the major forces through history by Will and Ariel Durant, and River Out of Eden by the insightful Richard Dawkins, which explains how evolution works.
Over time I learned that getting more out of life wasn’t just a matter of working harder at it. It was much more a matter of working effectively, because working effectively could increase my capacity by hundreds of times.
When I went to Africa a number of years ago, I saw a pack of hyenas take down a young wildebeest. My reaction was visceral. I felt empathy for the wildebeest and thought that what I had witnessed was horrible. But was that because it was horrible or was it because I am biased to believe it’s horrible when it is actually wonderful? That got me thinking. Would the world be a better or worse place if what I’d seen hadn’t occurred? That perspective drove me to consider the second- and third-order consequences so that I could see that the world would be worse. I now realize that nature optimizes for the whole, not for the individual, but most people judge good and bad based only on how it affects them. What I had seen was the process of nature at work, which is much more effective at furthering the improvement of the whole
Though most people think that they are striving to get the things (toys, bigger houses, money, status, etc.) that will make them happy, for most people those things don’t supply anywhere near the long-term satisfaction that getting better at something does.
Pain + Reflection = Progress. There is no avoiding pain, especially if you’re going after ambitious goals. Believe it or not, you are lucky to feel that kind of pain if you approach it correctly, because it is a signal that you need to find solutions so you can progress. If you can develop a reflexive reaction to psychic pain that causes you to reflect on it rather than avoid it, it will lead to your rapid learning/evolving.
Quite often the first-order consequences are the temptations that cost us what we really want, and sometimes they are the barriers that stand in our way. It’s almost as though nature sorts us by throwing us trick choices that have both types of consequences and penalizing those who make their decisions on the basis of the first-order consequences alone. By contrast, people who choose what they really want, and avoid the temptations and get over the pains that drive them away from what they really want, are much more likely to have successful lives.
Distinguish between you as the designer of your machine and you as a worker with your machine. One of the hardest things for people to do is to objectively look down on themselves within their circumstances (i.e., their machine) so that they can act as the machine’s designer and manager. Most people remain stuck in the perspective of being a worker within the machine. If you can recognize the differences between those roles and that it is much more important that you are a good designer/manager of your life than a good worker in it, you will be on the right path. To be successful, the “designer/manager you” has to be objective about what the “worker you” is really like, not believing in him more than he deserves, or putting him in jobs he shouldn’t be in.
There are many things people consider “good” in the sense that they are kind or considerate but fail to deliver what’s desired (like communism’s “from each according to his ability, to each according to his needs”). Nature would appear to consider them “bad,” and I’d agree with nature.
Everything other than evolution eventually disintegrates; we all are, and everything else is, vehicles for evolution. For example, while we see ourselves as individuals, we are essentially vessels for our genes that have lived millions of years and continuously use and shed bodies like ours.
Remember that great expectations create great capabilities. If you limit your goals to what you know you can achieve, you are setting the bar way too low.
Once you identify a problem, don’t tolerate it. Tolerating a problem has the same consequences as failing to identify it. Whether you tolerate it because you believe it cannot be solved, because you don’t care enough to solve it, or because you can’t muster enough of whatever it takes to solve it, if you don’t have the will to succeed, then your situation is hopeless. You need to develop a fierce intolerance of badness of any kind, regardless of its severity.
I define believable people as those who have repeatedly and successfully accomplished the thing in question—who have a strong track record with at least three successes—and have great explanations of their approach when probed.
Then I read Charles Duhigg’s best-selling book The Power of Habit, which really opened my eyes. I recommend that you read it yourself if your interest in this subject goes deeper than what I’m able to cover here.
Duhigg’s core idea is the role of the three-step “habit loop.” The first step is a cue—some “trigger that tells your brain to go into automatic mode and which habit to use,” according to Duhigg. Step two is the routine, “which can be physical or mental or emotional.” Finally, there is a reward, which helps your brain figure out if this particular loop is “worth remembering for the future.” Repetition reinforces this loop until over time it becomes automatic.
Reading Duhigg’s book taught me that if you really want to change, the best thing you can do is choose which habits to acquire and which to get rid of and then go about doing that. To help you, I recommend that you write down your three most harmful habits. Do that right now. Now pick one of those habits and be committed to breaking it. Can you do that? That would be extraordinarily impactful. If you break all three, you will radically improve the trajectory of your life. Or you can pick habits that you want to acquire and then acquire them.
The most valuable habit I’ve acquired is using pain to trigger quality reflections. If you can acquire this habit yourself, you will learn what causes your pain and what you can do about it, and it will have an enormous impact on your effectiveness.
One of the most important decisions you can make is who you ask questions of. Make sure they’re fully informed and believable. Find out who is responsible for whatever you are seeking to understand and then ask them. Listening to uninformed people is worse than having no answers at all.
Don’t believe everything you hear. Opinions are a dime a dozen and nearly everyone will share theirs with you. Many will state them as if they are facts. Don’t mistake opinions for facts.
It’s even more important that decision making be evidence-based and logical when groups of people are working together. If it’s not, the process will inevitably be dominated by the most powerful rather than the most insightful participants, which is not only unfair but suboptimal. Successful organizations have cultures in which evidence-based decision making is the norm rather than the exception.
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.
Create a Culture in Which It Is Okay to Make Mistakes and Unacceptable Not to Learn from Them
The point I made by not firing Ross was much more powerful than firing him would have been—I was demonstrating to him and others that it was okay to make mistakes and unacceptable not to learn from them. After the dust settled, Ross and I worked together to build an error log (we now call it the Issue Log), in which traders recorded all their mistakes and bad outcomes so we could track them and address them systematically. It has become one of the most powerful tools we have at Bridgewater. Our environment is one in which people understand that remarks such as “You handled that badly” are meant to be helpful rather than punitive.
Self-reflectiveness is the quality that most differentiates those who evolve quickly from those who don’t. Remember: Pain + Reflection = Progress.
Make it clear who is directing the meeting and whom it is meant to serve. Every meeting should be aimed at achieving someone’s goals; that person is the one responsible for the meeting and decides what they want to get out of it and how they will do so. Meetings without someone clearly responsible run a high risk of being directionless and unproductive.
Watch out for “topic slip.” Topic slip is random drifting from topic to topic without achieving completion on any of them. One way to avoid it is by tracking the conversation on a whiteboard so that everyone can see where you are.
Achieve completion in conversations. The main purpose of discussion is to achieve completion and get in sync, which leads to decisions and/or actions. Conversations that fail to reach completion are a waste of time. When there is an exchange of ideas, it is important to end it by stating the conclusions. If there is agreement, say it; if not, say that. Where further action has been decided, get those tasks on a to-do list, assign people to do them, and specify due dates. Write down your conclusions, working theories, and to-do’s in places that will lead to their being used as foundations for continued progress. To make sure this happens, assign someone to make sure notes are taken and follow-through occurs.
In typical organizations, most decisions are made either autocratically, by a top-down leader, or democratically, where everyone shares their opinions and those opinions that have the most support are implemented. Both systems produce inferior decision making. That’s because the best decisions are made by an idea meritocracy with believability-weighted decision making, in which the most capable people work through their disagreements with other capable people who have thought independently about what is true and what to do about it.
Beware of statements that begin with “I think that . . .” Just because someone thinks something doesn’t mean it’s true. Be especially skeptical of statements that begin with “I think that I . . .” since most people can’t accurately assess themselves.
When I was younger I didn’t really understand the saying, “Hire someone better than you.” Now, after decades of hiring, managing, and firing people, I understand that to be truly successful I need to be like a conductor of people, many of whom (if not all) can play their instruments better than I can—and that if I was a really great conductor, I would also be able to find a better conductor than me and hire him or her. My ultimate goal is to create a machine that works so well that I can just sit back and watch beauty happen.
At a high level, we look for people who think independently, argue open-mindedly and assertively, and above all else value the intense pursuit of truth and excellence, and through it, the rapid improvement of themselves and the organization.
Make finding the right people systematic and scientific. The process for choosing people should be systematically built out and evidence-based. You need to have a people-hiring machine in which the goals are clearly stated so that the outcomes can be compared with them and the machine (the design and the people) producing the outcomes can evolve to improve. Organizations typically hire people by having job candidates’ resumes reviewed by semi-random people based on semi-random criteria, which leads them to invite in candidates to have semi-random groups of people ask the candidates semi-random questions and then make their choices of whom to offer jobs based on the consensus of how they liked them. You need to make sure that each one of those steps is done more systematically and purposefully.
Personality assessments are valuable tools for getting a quick picture of what people are like in terms of their abilities, preferences, and style. They are often more objective and reliable than interviews.
Understand that a great manager is essentially an organizational engineer. Great managers are not philosophers, entertainers, doers, or artists. They are engineers. They see their organizations as machines and work assiduously to maintain and improve them. They create process-flow diagrams to show how the machine works and to evaluate its design. They build metrics to light up how well each of the individual parts of the machine (most importantly, the people) and the machine as a whole are working. And they tinker constantly with its designs and its people to make both better.
When a problem occurs, conduct the discussion at two levels: 1) the machine level (why that outcome was produced) and 2) the case-at-hand level (what to do about it). Don’t make the mistake of just having the case-at-hand discussion, because then you are micromanaging (i.e., you are doing your managee’s thinking and your managee will mistakenly think that’s okay). When having the machine-level discussion, think clearly how things should have gone and explore why they didn’t go that way.
Great managers orchestrate rather than do. Like the conductor of an orchestra, they do not play an instrument, but direct their people so that they play beautifully together. Micromanaging, in contrast, is telling the people who work for you exactly what tasks to do or doing their tasks for them. Not managing is having them do their jobs without your oversight and involvement. To be successful, you need to understand these differences and manage at the right level.
You should be able to delegate the details. If you keep getting bogged down in details, you either have a problem with managing or training, or you have the wrong people doing the job. The real sign of a master manager is that he doesn’t have to do practically anything. Managers should view the need to get involved in the nitty-gritty as a bad sign.
Vary your involvement based on your confidence. Management largely consists of scanning and probing everything you are responsible for to identify suspicious signs. Based on what you see, you should vary your degree of digging, doing more for people and areas that look suspicious, and less where what you see instills confidence. At Bridgewater a host of tools (Issue Logs, metrics, daily updates, checklists) produce objective performance-related data. Managers should review and spot-check them regularly.
Use daily updates as a tool for staying on top of what your people are doing and thinking. I ask each person who reports to me to take about ten to fifteen minutes to write a brief description of what they did that day, the issues pertaining to them, and their reflections. By reading these updates and triangulating them (i.e., seeing other people’s takes on what they are doing together), I can gauge how they are working together, what their moods are, and which threads I should pull on.
The sucked-down phenomenon is what happens when a manager chronically fails to properly redesign an area of responsibility to keep him or herself from having to do the job that others should be capable of doing well. You can tell this problem exists when the manager focuses more on getting tasks done than on operating his or her machine.
The most common mistake I see people make is dealing with their problems as one-offs rather than using them to diagnose how their machine is working so that they can improve it. They move on to fix problems without getting at their root causes, which is a recipe for continued failure. A thorough and accurate diagnosis, while more time-consuming, will pay huge dividends in the future.
Algorithms are principles in action on a continuous basis. I believe that systemized, evidence-based decision making will radically improve the quality of management. Human managers process information spontaneously using poorly thought-out criteria and are unproductively affected by their emotional biases. These all lead to suboptimal decisions. Imagine what it would be like to have a machine that processes high-quality data using high-quality decision-making principles/criteria. Like the GPS in your car, it would be invaluable, whether you follow all of its suggestions or not. I believe that such tools will be essential in the future, and as I write these words, I am a short time away from getting a prototype online.
Don’t build the organization to fit the people. Managers will often take the people who work in their organization as a given and try to make the organization work well with them. That’s backward. Instead, they should imagine the best organization and then make sure the right people are chosen for it. Jobs should be created based on the work that needs to be done, not what people want to do or which people are available.
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.
Leverage in an organization is not unlike leverage in the markets; you’re looking for ways to achieve more with less. At Bridgewater, I typically work at about 50:1 leverage, meaning that for every hour I spend with each person who works for me, they spend about fifty hours working to move the project along. At our sessions, we go over the vision and the deliverables, then they work on them, and then we review the work, and they move forward based on my feedback—and we do that over and over again.