A favorite theme of Ray Dalio’s is to view things top-down as a machine, and to see yourself as a designer of the machine.
This applies to you as a machine in life. You can see yourself as a machine that takes in goals and other inputs, then produces outputs. Your job is to design a machine and tweak it so that it gets you the results you want.
This mindset also applies to organizations. You can see your team or business as a machine that operates to deliver the result you want (more on this in the Work Principles section later).
What’s the difference between top-down and bottom-up perspectives?
Looking from the bottom-up means looking at each specific case and how they differ from each other. For example, it looks at how the duck animal species is different from a dog and different from a human.
The top-down perspective tries to find what is common to all the specific cases. For animal species, a top-down perspective finds the forces of natural selection acting on DNA, and how that changes animal behavior.
Many people look at the world mostly from the bottom-up. They see all the individual cases and think about how each one is special. They see themselves as unique people, immune to the universal laws that affect all humans and all animals. Even more, they see themselves as behaving differently day-to-day and in different situations.
Looking from the bottom-up constrains your ability to find universal laws. It prevents you from finding the rules that govern how you behave in different situations, and it prevents you from changing those rules to get a better output.
The superior way to see things, Dalio believes, is from the top-down, visualizing things like a machine—a collection of predictable, repeatable rules that behaves the same way for a given situation.
While humans appear special in a number of ways, if you see humans top-down as one of millions of animal species, you’ll see the vast commonalities we have with animals. We’re driven by the same drives for food, water, sex, and resources.
Compared to the complexity of nature, humans are just a speck of moss on a rock. Nature operates with incredibly powerful forces, like natural selection, over millions of species. For all that humans can do, we can’t yet build a single ant from scratch, while nature clearly has done that and much more.
Like many complex systems, nature mostly operates with the individual merely understanding its own self-interest and not visualizing the entire game. For example, evolution has wired us to enjoy sex, getting a huge incentive from pleasure; we can have sex without thinking about how its evolved purpose is to pass on DNA and further operate the machine of natural selection.
Think of yourself as a machine. You take in inputs, and you produce an output. For example, you take in the inputs of your goals, resources, and current skills, and you produce the output of progress toward your goals.
Your aim is to design your machine to produce better outcomes.
If you view yourself top-down like a machine, it becomes easier to see your weaknesses objectively. If your air conditioner broke, you wouldn’t tolerate it. You’d find what was wrong, fix it, and try to prevent it from breaking again. Why should you view yourself any differently? Your personal weaknesses are problems in the machine that cannot be tolerated and must be fixed.
In this way, think of yourself as a machine operating within a machine. You are both a worker in the machine, as well as a designer. You can alter your machines to produce better outcomes. (Shortform note: This can keep getting deeper—you can also improve the machine that designs the machine, such as by learning new principles of effective machines.)
As the designer of your machine, you are tasked with designing the team to best meet your desired outcome.
For example, say you’re in the military and you have to capture an outpost from an enemy. First you design the makeup of the team—two scouts, three snipers, five riflemen, and so on. Then you put the right people in the right position—the scouts need to be fast movers, the snipers need to shoot accurately, and so on.
Likewise, you should view yourself and other people around you as part of a machine. You need to define what roles you need, then put the best people in those roles.
This means figuring out whether you yourself are in the right role. Can you really be trusted to work in your position, or do you need to be fired? For example, if you have trouble executing things to completion, should you fire yourself as the person who executes and hire someone better?
Consider the rules and algorithms you use for decision making. If they lead to the wrong output, the weightings or rules need to be changed.
(Shortform note: For example, think of how you spend your time. Is your time optimally allocated among the activities that will help you best meet your goals? If not, then what is causing you to spend your time this way? Designing the rules that govern how you spend your time will improve how your machine works.)
As a financial trader, Dalio learned to see the market as a machine, composed of a network of things that had cause-effect relationships with each other. For example, how much livestock there were and how much they ate influenced the demand for corn and soybean.
By visualizing the machine this way, Dalio was able to write down the rules of the cause-effect relationships, then write down his trading rules that would profit from this understanding. He found this top-down thinking to be a big advantage for Bridgewater, compared to other traders who just saw a narrower picture.
Here are more examples of how Dalio sees markets as machines:
Like all good systems, economic systems are naturally self-correcting.