#BOOKNOTES: Principles by Ray Dalio

Born in 1949 to a middle-class family in Long Island, New York, the son of a jazz musician and a stay-at-home mom. From an early age, he learned that one of his most significant weaknesses was his rote memory, and he had a particular dislike for following instructions. However, he was incredibly curious and enjoyed finding things out by himself.

Ray disliked school. He found everything uninteresting, and couldn’t understand why doing well was important, apart from keeping his mother happy. When he didn’t want to do something, it was impossible to get him to do it, but if he was interested in it, nothing could hold him back. Although he hated doing chores, he had many part-time jobs as he loved having his own money. At the age of twelve, while working as a caddy driver at a golf course, he overheard some golfers talking about the stock market. He got so excited by it that he took his wages from the golf club and invested them in stocks.

After graduating from Harvard with an MBA, Dalio worked at a couple of brokerage firms before punching his boss in the face, and getting fired! Nevertheless, all of the brokers he worked with, and their clients, kept coming back to him for his advice. This was when Dalio started Bridgewater Associates—from out of his two-bedroom apartment. 

From here, he began to develop early computer models that could predict the market based on various pieces of data that were entered into it. It was at this time that he started to do four things that he would continue to do throughout his working life:

1. Visualize complex systems as machines

2. Work out the cause and effect relationships between them

3. Write down principles on how to deal with them

4. Feed this data into a computer so it could make decisions “for”him

While making money was good, Dalio discovered that having meaningful work was more important. 

Focus on:

1. Find the smartest people who oppose your opinion to try to understand their perspective

2. Know when not to have an opinion

3. Develop, test, and then systematize a set of timeless principles

4. Balance risks to keep big potential gains but reduce massive losses

Principles

Ways to handle scenarios that repeatedly happen in similar situations. You will not start life with principles pre-installed. Instead, you must gain principles from your life experiences. Mistakes are essential for the development of your principles. You must reflect on these mistakes and change your principles accordingly. Think of this as a challenge and an adventure.

The quality of the decisions you make when you encounter these circumstances will determine your quality of life. Particularly, the way you incorporate your mistakes into your principles will determine whether you become a successful person. 

Embrace reality & deal with it

You can’t create your desired outcomes unless you see the truth about yourself, others and what’s going on. 

The first step to getting a better idea of what reality is is to be a hyperrealist. This understanding prevents you from getting lost in unrealistic dreams that will never come to fruition. 

Dreams + reality + determination = a successful life.

To accept reality as it is, you need to be both radically open-minded and radically transparent. This open-mindedness helps you learn quickly and effectuate effective change. The more open-minded you are, the less you are likely to lie to yourself. 

Te correlation between success and the drive to evolve is embodied in the following five points:

1. An individual’s incentives must always be aligned with a group’s goals. Evolution works in the same way

2. Therefore, when you contribute to the whole, not just to further yourself, you will be rewarded

3. Using trial and error to adapt is essential and invaluable

4. Understand that you are simultaneously both everything and nothing, but you can choose which one you want to be. From the perspective of nature, we are insignificant, but from the perspective of our brains, we are our entire universe. We can choose to make small, modest contributions in our short lifespans

5. What you are depends on your perspective

Follow the Five-Step Process

Know your goals and chase them. What is best for you depends on your nature. You need to understand yourself and know what you want to achieve in life.

Encounter problems that stand in the way of getting to your goals. These problems are painful. If poorly handled, some of them can lead to your ruin. But to evolve, you need to identify those problems and not tolerate them.

Diagnose these problems to get at their root causes. Don’t jump to solutions. Take a step back and reflect to distinguish the symptoms from the disease.

Design a plan to eliminate the problems. This is where you will determine what you must do to get around them.

Execute those designs, pushing yourself to do what’s needed to progress toward your goal.

By honestly looking at your problems and devising a plan to overcome them, you open yourself up to the chance of evolving. However, to evolve swiftly, you’ll need to go through this process quickly and continuously, each time setting your goals a little higher. This 5-step process is iterative, which means that if you complete one step, you have all the information at hand to lead you on to the next one.

Be radically open-minded

Being radically open-minded is one of the most, if not the most, important features you require if you want to be successful. You prevent yourself from getting what you want out of life because of two barriers: Your ego and your blind spots. These two barriers stop you from seeing reality objectively. Radical open-mindedness allows you to overcome this.

Radical open-mindedness helps you to make the most optimal choices. It allows you to explore varying points of view without letting the trappings of your ego or your blind spots get in the way. It requires you to replace your notion of always being right, with the desire to learn what is true. 

Each individual’s believability is weighted based on evidence. This evidence involves their track record, test results, and other crucial data. Decision-makers can overrule believability-weighted voting, but only at their peril.

Understand that people are wired differently

A great deal of power comes in knowing first, how you are wired, and second, how others are wired. Like everyone else, you are born with a selection of attributes that can either hurt you or help you: the more extreme a particular attribute, the more extreme the potential for either good or bad.

A further way to better understand how yourself and others are wired is to undergo a psychometric assessment. There are four assessments that Dalio uses:

– The Myers-Briggs Type Indicator

– The Workplace Personality Inventory

– The Team Dimensions Profile

– The Stratified Systems Theory

By understanding how people work, and using psychometric tests, you’ll be able to get the right people into the right roles, which is the key to achieving your goals.

Learn how to make decisions effectively

1. Recognize that emotions pose the greatest threat to making decisions and that arriving at a decision is a two-step process of learning and then deciding

2. Synthesize your current situation, i.e., identify the factors that are important to your ongoing decision-making process

3. Synthesize the situation through time, i.e., observe how different factors behave over time to get a better understanding of their true nature

4. Switch between perspectives. This means seeing both the big picture, and the subtle nuances of your decision-making process

5. Rely on logic, reasoning, and common sense if you want to get the best picture of reality

6. Arrive at your decisions as you would if you were making a value calculation. Think of each decision you make as a bet with a probability of it being right or wrong

7. Choose whether you need to prioritize acquiring more information before making a decision, or whether it’s more valuable to make a quick decision

8. Simplify your decision-making process by removing all of the superfluous information

9. Use principles so you can be clear about the criteria you are using when arriving at a decision

10. Weight your decision-making according to believability, i.e., get the opinion of some trusted, smart experts on your decision before you commit to it

11. Convert your principles into algorithms so a computer can make decisions alongside you

12. However, don’t fully trust AI without having a solid understanding of how it works