(2024-04-01) Chin On Dalio's Principles

Cedric Chin On Ray Dalio's Principles. In 2011, I read a free, online-only book by Ray Dalio named Principles that changed my life... The book was then a handbook for Bridgewater employees, but was really a how-to guide to becoming effective at life — that is, achieving your goals, no matter how difficult things might be... You should read this if you don't have time to read Principles, but still want to benefit from Dalio's ideas. The sequence is in eight parts, at 10-15 minutes reading time each.

1. The Principles Sequence

An accounting of weaknesses

The first story is about my move to Vietnam.

I'd been to about a dozen intern events in the Valley, and was painfully aware of the sheer amount of intelligence that I would have to compete with if I were to move there.

I was an average software engineer. I was a bad Computer Science student.

I could write, and I could build organisations. I needed to find a way to leverage my strengths to make up for my weaknesses.

Ray Dalio's Principles & Hyper-Realism

There's a book called Principles by Ray Dalio. I read it when I was a second year student in university, in a very dark period of my life: I'd just broken up with my first girlfriend, I'd failed 2 exams

Dalio's book is not a very nice book to read when you're hurting. He believes in tough love; therefore his book is pretty much all tough love. But I'd like to ask you the same questions his book asked of me back then:

• What do you know is true?
• What are your goals? Or, alternatively: what do you want to achieve in life?
• What are you going to do to achieve 2) in light of 1)?

My first career strategy

Believability

In Principles, Dalio writes about how you should pay special attention to people who are ‘believable’ with regard to their subject matter. People are ‘believable’ when they:

• Have executed at least 3 successes in their specific field, and ...
• Are able to articulate exactly how they succeeded

I've thought pretty deeply about how I should write this blog and how I can create the most value for the people who read me

Decision-making and career-planning is difficult to write about because it's context-dependent.

So there are two approaches I can take. The first is to write in an abstract manner, listing the mental models and principles that have worked for me, unmoored of specific circumstances. I disagree with this method

The other way is to be completely transparent about my struggle.

My motivation is a real fear: I really am afraid of a future where my skills are rendered irrelevant

2. Summary of Ray Dalio's Principles

Background of the book

Dalio originally wrote Principles as a badly-formatted PDF

the version you may buy on Amazon today is a highly polished production by comparison. The core ideas remain the same

The book is primarily about what Dalio calls his ‘principles’. I’ll let Dalio define it: "The most important thing I learned is an approach to life based on principles that helps me find out what’s true and what to do about it."

In the Principles Sequence, I intend to summarise only the Life Principles segment of the book. The Work Principles segment was always meant as a reference guide, never meant to be read front to back.

Criticism

There are two main criticisms of Principles

The first, as far as I can tell, are the reviewers who take umbrage at Where I’m Coming From, arguing that Dalio was showing off his successes as justification for his “self-help book”.

The second kind of criticism is that the ideas in Principles are trite maxims recycled from other self-help writers and speakers. Worse, several of Dalio’s ideas are debunked pseudo-scientific dribble: his over-reliance on MBTI personality tests in Bridgewater, for instance

These are valid criticisms. But they are wrong

Dalio wrote: “What I hope for most is that you will carefully consider the principles we will be exploring in this document and try operating by them, as part of the process of discovering what works best for you*

While this particular document will always express just what I believe, other people will certainly have their own principles

Repeatedly, throughout the older version of the book, Dalio would pause and say (I’m paraphrasing here): “Ask yourself: do you believe that what I am saying is true? Why? Why not? How can you verify this in your life?”

Dalio’s intention for Where I’m Coming From was to give us the context within which he created his principles

I think Dalio’s Principles follows directly from his history as a hedge-fund manager. In what other field would a CEO find it necessary to record every decision, catalog every trade, list all the principles that govern his decision-making processes?

Principles IS weird. It’s adapted to the contours of Dalio’s life. Its ideas are over-fitted to Dalio’s biases and life experiences

For what it’s worth, I find Dalio to be a lot more believable than Tony Robbins

Why does it work so well?

It’s probably a good question to ask: how is it that a book with pseudo-scientific claims

how can such a book be so effective?

I read Principles and applied it to my life, and found that it worked

The answer, I think, is because Principles is rational, and rationality matters for success

Keith Stanovich, a professor of applied psychology at the University of Toronto, distinguishes between intelligence quotient (IQ) and rationality quotient (RQ).

RQ is the ability to think rationally and, as a consequence, to make good decisions

the correlation coefficient between IQ and RQ is relatively low at .20 to .35.

you can pick out the signatures of rational thinking if you are alert to them. According to Stanovich, they include adaptive behavioral acts, efficient behavioral regulation, sensible goal prioritization, reflectivity, and the proper treatment of evidence

3. Ray Dalio's Hyperrealism

Embrace reality and deal with it

Dalio argues that reality is a machine, with rules, that you can learn. (cf (2020-02-25) Chin To Get Good Go After The Metagame)

Dalio argues that each time you encounter a problem in life, you should methodically experiment with ways to overcome that problem

This applies to everything: dealing with bosses, managing projects, learning new skills, dating

Pragmatism

So let's work with that pragmatism. “It is more useful for you to believe that the world is a machine and that you can learn its rules in order to achieve better outcomes.”

Your partner dumps you; the job you desire rejects your application outright. Dalio argues that pain and reflection is how you progress

every time you deal with a difficult person, it is tempting to throw your hands up in despair. But truly effective people would constantly and methodically experiment with approaches to either neutralise, handle, or work around such difficult people

The Decisions

Dalio gives us a list of 5 decisions necessary for ‘embracing reality and dealing’

Don't get hung up on your views of how things should be, because you will miss out on learning how they really are.

Don't let pain stand in the way of progress

Pain + Reflection = Progress.

you should learn to see pain as a signal for reflection. It is too much to ask for most of us to recognise pain during the event that causes us pain. But it's enough if we can look back on periods of pain in our recent past as opportunities for us to grow

Don’t worry about looking good — worry instead about achieving your goals.

Weigh second- and third-order consequences

Own your outcomes

Don't blame bad outcomes on anyone but yourself

So: take responsibility for every bad outcome, even when it's caused by a freak accident that nobody could have prevented

Psychologists call this having an “internal locus of control,”

don't worry about whether you like your situation or not. Life doesn't give a damn about what you like.

4. Dalio's 5 Step Process (To Getting What You Want Out Of Life)

I’m currently a ‘solopreneur’ — one of those people who saved up money for a 2 year shot at building a self-sustaining business. If I fail, I go back to getting a job. If I succeed, I have what’s called ‘optionality’: an income stream divorced from my efforts

Which opportunities do you go for? Which one lets you achieve your goal? You’ve got 24 months to burn; it’s not clear what’s the best use of those months.

My biggest enemy isn’t really time. My biggest enemy is me.

Dalio’s 5 Step Process

The 5 steps read like trite, common-sensical garbage

• Have clear goals.
• Identify and don’t tolerate problems that stand in the way of your achieving your goals.
• Accurately diagnose the problems to get at their root causes.
• Design plans that will get you around them.
• Do what’s necessary to push these designs through to results

the proof of the pudding is in the eating, and the efficacy of these steps lie in how well you do them. Consider just two questions: a) how often do you do these steps systematically, and b) do you compensate for the steps you are bad at?

Dalio isn’t interested in intuition. Human intuition is inconsistent and often wrong. You can only debug a process if it’s systematic and rationally considered

The other aspect Dalio urges us to consider is that we are all bad at one or more of these steps

I'd like you to follow along with some goals of your own. Download the following worksheet and fill it in as you read; I'll use myself as an example for you to follow.

What I’m bad at

Before I begin with the 5 step process, I should admit to myself which of the 5 steps I’m bad at. You should do the same

I can accurately diagnose root causes if I bring myself to recognise that there’s a problem. If I’m lying to myself, then, well.

Step 1: Have Clear Goals

thinking about what you’re denying yourself when you choose a specific goal

Don’t confuse goals with desires

Decide what you really want in life by reconciling your goals and your desires

Never rule out a goal because you think it's unattainable

My goal is to build a sustainable business that provides for me and mine. The short term goal is to build a business with $500 in recurring revenue by December 31st 2018, the end of this year, OR sell a product that makes $3000 by the same date, so long as that product creates an audience

Step 2: Identify and don't tolerate problems.

Don't avoid confronting problems because they are rooted in harsh realities that are unpleasant to look at

The good news is that I'm now on my own, with a low burn, without the artificial time constraints of a VC-funded, return-driven program. I can take the time I need to reconfigure my internal state.

Be specific in identifying your problems

you need a precise, specific description of your problem, because different problems require drastically different solutions

Don't mistake a cause of the problem with the real problem

My biggest problem is distribution. I can build any software product I want, given the number of years I've spent learning to build products. I can solve a large set of business problems. But if I can't get people to hear about it, I'm screwed.

I have built an audience before. Back when I was a teenager, I built Novelr.com, which was a site for web fiction publishing. But the skills I used to build that audience may be irrelevant today — in the 11 years since I did Novelr, online reading habits have changed drastically. People don't read blogs as much. The majority of content consumption happens on social media. I haven't kept up to date with social media marketing; I don't even have a Facebook account. This is a problem.

Step 3: Diagnose problems to get at their root causes

Root causes can be painful to admit. Dalio argues that proximate causes are typically the actions (or lack of actions) that lead to problems

You must solve root causes, not proximate ones.

So let's diagnose my problem: My problem with getting an audience is that I lack marketing skills suited for the current reading climate

But, wait, I didn't feel any pain admitting that. This is a proximate cause of my problem, not a root cause.

The root cause is that I don’t feel comfortable doing marketing! I would have to put myself out there and expose my work to others.

Step 4: Design a Plan

Think about your problem as a set of outcomes produced by a machine

Think of your plan as being like a movie script in that you visualise who will do what through time

So what’s my plan? I’ll still have to get those marketing skills. But I’ll need to deal with my internal mentality-related problems first.

So here’s the plan: I’m going to be using an 8-week “monk mode” work cycle. By the end of Week 7, I must have the management course ready for launch

Step 5: Push Through To Completion

5. On Lying To Yourself

Dalio opens by saying this is “probably the most important chapter, because it explains how to get around the two things standing in most people's way of getting what they want out of life.”

The two things are:

• Your ego barrier (that is, the part of your brain that causes you to lie to yourself), and
• Your blind spot barrier (that is, the perspectives and thinking that you cannot see, which stems from your unique strengths.)

The Ego Barrier

It's easiest to think of yourself as having two ‘yous’. There's a conscious part of your brain that reasons rationally. And there's the subconscious part that reacts defensively and simplifies; offering excuses and blaming others when you screw things up

The Blind Spot Barrier

These blind spots are the inevitable consequences of our strengths

when you're trying to solve a problem. Most people attempt to figure things out on their own, and thus ‘spin in their own heads’ instead of taking advantage of all the wonderful thinking available to them outside their heads

you will save yourself more time if you seek out people who think differently from you and are complementary to your strengths, and rely on them or their thinking instead.

Radical Open Mindedness

implemented in two practices

Thoughtful Disagreement — a protocol Dalio has formalised in Bridgewater

Triangulation of Views with Believable People Who Are Willing To Disagree

Dalio argues that true open-mindedness is the adoption of a couple of principles

Believe that you might not know the best possible path, and recognise that your ability to deal well with “not knowing” is more important than whatever it is that you do know.

Recognise that decision making is a two-step process. The first step is to take in all the relevant information, in a state of uncomfortable ‘not knowing’. The second step is to decide. Dalio observes that most people aren't comfortable staying in step one, because they don't like not knowing

Be clear on whether you are arguing or seeking to understand and think about which is most appropriate based on your and others’ believability

believable people are people who have 1) a record of at least three relevant successes and 2) have great explanations of their approach when probed

The Practice of Thoughtful Disagreement

The goal of thoughtful disagreement is to find out which view is true and decide what to do about it, not to convince the other party that you are right. The motivation behind this practice is the genuine fear of missing important perspectives

Ask questions more than make statements

Use the 2 minute rule — in which neither interrupts the other, so that both have time to get all their thoughts out.

Triangulate Your View With Believable People Who Are Willing To Disagree

engage multiple believable people, and then get them to disagree thoughtfully with each other

The difference between closed-minded and open-minded people

Reflections On The Chapter

I read this chapter and recognised myself in more of the closed-minded descriptions above, as compared to the open-minded ones

6. Understand that People are Wired Very Differently

you're probably already familiar with the idea of task-personality-suitability. This is a rather complicated way of saying “assigning tasks to people who have the right disposition for them.”

So here's the question: what happens when you want to scale this practice to a thousand people? What do you do then?

The Conventional Solution

The common answer to this question of scaling managerial judgment is to have good management training. In the ideal conventional organisation, the managers who lead teams are competent, and are trained to assign tasks according to an understanding of individual strengths

But there are problems with this approach, as we are all likely familiar with. Managers aren't uniformly good

His solution to this problem of scaling managerial judgment is to use psychometric testing for everything

Understanding People

Dalio spends a lot of time describing the psychometric testing Bridgewater employs to scale management

pseudoscience

The broad argument the chapter makes, however, is compelling and simple: that there is power from understanding how humans are wired

First, that we are born with innate attributes and dispositions that help us and hurt us depending on their application. This is a reference to our personality attributes, which predisposes us to act and think in certain ways.

That we are social animals, and are built for meaningful work and meaningful relationships

we should train our lower brains with kindness and persistence to build the right habits. The right approach to take, Dalio says, when your lower brain messes up, is to treat it as you would a child who doesn't know any better

Orchestrating Others

Employees at Bridgewater are subjected to four psychometric tests: the Myers-Briggs Type Indicator (MBTI), the Workplace Personality Inventory, the Team Dimensions Profile, and the Stratified Systems Theory

Dalio says they're experimenting with the more scientifically-accepted Big Five test and would include it if the results pan out

The MBTI assessment tests for four qualities

The truth is that the personality profiles aren't particularly useful. So what if I’m “The Mastermind” in the MBTI framework? How is this ever helpful in day-to-day business?

What Bridgewater does differently is that they use each trait to inform clashes during heated debate

results of all four tests, resulting in “twenty-five to fifty attributes (...) each one coming in varying degrees of strength” like colour tones

available on each member's internal company profile, called a "baseball card"

A Bridgewater employee's baseball card consists of a grid of dots, each representing a personality attribute

Bridgewater managers can overlay the baseball cards for all members of a team to get a quick visual indicator of missing strengths

Closing Thoughts

Am I convinced that Dalio's central argument is right? Yes, I am.

Am I convinced that Dalio's management style at Bridgewater makes sense? No, I'm not entirely convinced.

I also think Dalio's desire to systematise everything leaves gaping holes in his management practice

Take, for instance, the research into psychological safety

Dalio's solution to guaranteeing that group norms don't override individual strengths is to create a culture of systematised truth-seeking in his entire company

At Bridgewater, psych safety doesn't matter due to its overarching culture of honest, biting criticism, its tough love ethos, its protocol of thoughtful disagreement, and the pressing need of the business to seek the truth at all costs.

The cost, of course, is that Bridgewater's turnover is a third of its new employees

In the end, however, it does not matter what I believe. I'm optimistic that there's a spot somewhere in the organisational solution space that allows one to scale psych safety without creating a ruthless Bridgewater-like culture. But I say this as an observer, not as a practitioner — or at least, not yet.

7. Being an Effective Decision Maker

But this prescription isn't something that's immediately useful. It's not clear, after all, how to judge that you've improved at decision making.

Learning and then Deciding

Decision making is a two-step process: learning first, then deciding

The biggest threat to good decision making is harmful emotions that prevent you from learning well

how do you actually learn well? This consists of two major things:

• Synthesising accurately.
• Navigating levels well.

Synthesising Accurately

The pointers Dalio gives us on synthesising your situation over time all speak to this power of being imprecise:

Keep in mind the rates of change, the levels of things, and the relationships between them

Be imprecise

Part of the reason imprecision works is due to the 80/20 rule

Navigating Levels

The key here is to recognise that organising topics into a hierarchy of levels will make decision making easier, because you aren’t facing an undifferentiated pile of facts. Decision making needs to take place at the right level, but also be consistent across levels.

Deciding Well

Do evidence-based decision making

Slow

Make decisions as expected value calculations

Raising the probability of being right is valuable no matter what your probability of being right currently is — you can almost always improve your odds of being right by doing things that will give you more information

Knowing when not to bet is as important as knowing when to bet — if your penalty x probability of being wrong is too high, don't do it.

The best choices are the ones that have more pros than cons, not those that don't have any cons at all

Prioritise by weighing the value of additional information against the cost of not deciding

Simplify

Use principles

Slow down your thinking so you can note the criteria you are using to make your decision.

• Write the criteria down as a principle
• Think about those criteria when you have an outcome to assess, and refine them before the next “one of those” comes along.

Believability weight your decision making

Finally, turn principles into programs

Bridgewater turned their trading principles into finance advisory programs

the firm has built a bunch of internal apps to help with managerial decisions

Closing Thoughts on Evaluating Decision Making

I can think of three ways you can tell that you've improved in identifying good decisions

The first way is to focus on the process, not the goal

The second way is to adopt Dalio's method of triangulating your opinions with people who are more believable than you

Third and last, I've found some of the ideas in Principles to be very useful ‘ways of seeing’.

8. The End of the Principles Sequence

Seven Habits of Highly Effective People was a product of its time. In retrospectives, Covey said that he reacted to the trend of self-help books of his generation to focus on superficial ‘personality traits’ — surface level attributes that people could adopt easily. Instead, he wrote 7 Habits to focus on ‘character traits’, which he regarded as the result of timeless and universal principles

If I were to summarise Ray Dalio’s Principles in a single sentence, it is that it is an odd but valuable book that is the product of an odd but valuable organisation, made possible only by their success in a uniquely fast-paced industry.

• It is also a product of our time

If you’ve been through a failure as total as Dalio has, and come out of it alive, and rebuilt your fund from the ground up to become one of the most successful in the world, and then successfully predict the 2008 financial crisis, you’d be pretty darned confident that you could understand reality, model it, and develop a plan to deal with it