Ray Dalio, born in 1949, is the billionaire founder of Bridgewater Associates, one of the world’s largest hedge funds. He wrote _Principles_ to pass on his principles for living life and reaching goals.

### What Are Principles?

What are principles? **Principles are the fundamental truths that determine how you behave. They reflect your inner character and values.**

Principles help you deal with the complexity of life. Every day, you face new situations that require our response. If you had to decide what to do at each point in time, you’d react impulsively and be exhausted. Instead, your fundamental principles help you figure out what situation you’re facing and how to deal with the situation.

We all have principles. Successful people adopt principles that help them be successful. Ray Dalio’s goal is to share the principles that have worked for him throughout his life and contributed to his success.

### The 5-Step Process for Getting What You Want

There is a 5-step process for getting anything that you want out of life. It goes:

1.  Set clear goals.
2.  Identify problems and don’t tolerate them.
3.  Diagnose your problems to find root causes.
4.  Design solutions to get around problems.
5.  Do the tasks required to completion.

To achieve success, **you need to follow each of these steps in order, one at a time**. When setting goals, you shouldn’t think about barriers—just set the goals. When diagnosing your problems, don’t worry about how you’ll solve them—just find the root causes.

These 5 steps also form a loop. Once you complete one turn of the loop, then you’ll look at your results and go through the process again, setting new, higher goals.

People are usually weak at one or more of these steps. Identify what your weakest steps are. Then get better at them, or find someone who can help you compensate for them.

### Embrace Reality and Relentlessly Find the Truth

Finding the truth is the most important thing possible to make the best possible decisions you can. Making the best decisions gets you closer to your goals.

Two things get in the way of finding truth: 1) your ego and emotions, 2) your blind spots.

#### Your Ego

What holds a lot of people back from the truth is their ego. Many people’s egos center around being right and looking smart. But everyone is wrong a good portion of the time, and ignoring this is blinding yourself to your mistakes and ways to improve yourself.

To deal with the emotional pain of finding truth, see life as a game, where the object is to get around a challenge and reach a goal.

**Instead of declaring “I’m right,” ask, “_How_ do I know I’m right?”** You can’t be sure of anything—there are always risks that can hurt you badly, even in the safest-looking bets. **Always assume you’re missing something.**

#### Embrace Your Mistakes

An important truth people commonly ignore is their own weaknesses and mistakes. Thinking about their mistakes causes them pain.

By ignoring your weaknesses and mistakes, you are handicapping yourself in achieving your goals.

Mistakes happen all the time. **It’s more important to recognize mistakes and learn from them, than to cover them up and make your problems worse.**

Mistakes and pain are nature’s reminder to learn. You must reflect on your mistakes and design solutions to your problems to evolve. Dalio sums it up in his equation, **“Pain + Reflection = Progress.”**

**Treat each mistake like a puzzle that, after you solve it, reveals a gem.** Each gem continuously makes you stronger, and more gems help you ascend to higher levels of play where the challenges get greater.

### Radical Open-Mindedness

To recognize the truth, **you must accept that you are wrong and relentlessly find ways to increase the chances that you are right**. Dalio calls this **radical open-mindedness**. Taking in more information, especially from other highly credible people, can only allow you to make better decisions, which will bring you closer to your goal.

Would you _willingly_ blind yourself into doing something wrong? Most people do this.

Recognize that the chance that you independently always have the best answer is extremely low. Accept the possibility that others might see something better than you and point out threats and opportunities you don’t see.

Always be fearful that you’re wrong and you’re missing information. Don’t say “I’m right,” ask, “How do I know I’m right?”

#### Disagree Thoughtfully

Being open-minded will make you seek other smart people and explore their viewpoints, especially when you disagree with each other. This may create emotional conflict.

The key is to have “thoughtful disagreement” with the other person. **This means your goal is not to prove that you’re right, but rather to find out which view is true and decide what to do about it.**

Your ego may get in the way of getting new perspectives from other people. But if you care about your goals, you should be more afraid of missing important ideas than being proven wrong. **What stings more—being wrong about something, or ultimately failing your goal?**

People are wired very differently. They think in different ways and have different blind spots. This promotes conflict and misunderstandings with poor communication. Practice thoughtful disagreement to see their viewpoint, and arrive at the truth together rationally.

### Visualizing Complex Systems as Machines

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.

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?

### Work Principles

The Work Principles are really just his Life Principles applied at organizational scale.

Like with personal life, the ultimate goal in work is to find the truth by leveraging the strengths of the group. The trick is to do this with thoughtful disagreement while bypassing the inevitable emotional conflicts that arise.

#### Idea Meritocracy

An idea meritocracy is an environment in which the best ideas win, regardless of where or whom they came from. Dalio believes **the idea meritocracy is the best system for making decisions.**

The way to build an effective idea meritocracy is to:

1.  Bring together smart, independent thinkers
2.  Have them thoughtfully disagree with each other
3.  Get past disagreement using agreed-upon systems.

Together, this will yield the best ideas and collective thinking. Idea meritocracy works better than just one person coming up with the ideas and issuing orders. It also works better than a group of smart people who can’t thoughtfully disagree with each other.

An idea meritocracy is built on a few foundational principles:

*   Radical truth
*   Radical transparency
*   Thoughtful disagreement
*   Believability-weighted decision making

#### Radical Truth and Transparency

Radical truth and transparency are critical to building the best idea meritocracy. If you have access to more truthful information, you can make better decisions. When everyone is able to hear what everyone else is thinking, learning compounds and the organization gets better.

In contrast, hiding the truth from people is like letting your kids grow up while still believing in the Tooth Fairy.

**Radical truth means not putting a filter on your thoughts.** You reveal your thoughts and questions relentlessly. You surface issues immediately instead of hiding them.

When the entire organization does this, it creates opportunities to have thoughtful disagreement and see things through each other’s eyes. It surfaces disagreements when they first appear, rather than letting them fester under the surface.

In contrast, at many workplaces, people tend to hide their real thoughts, and they bury problems and disagreements. This aggravates misunderstandings or disagreements, and it leads to larger conflicts and distance between team members.

**Radical transparency lets everyone see everything.** Everyone gets access to the full truthful information, rather than having it filtered through other people first. In turn, people with better information can make better decisions, and the organization draws on the full power of its people. At Bridgewater, radical transparency means all meetings and interviews are recorded and made available to the entire team, and people’s assessments of each other are all public.

#### Believability-Weighted Decision Making

Once facts and viewpoints are put out there through radical truth and thoughtful disagreement, how do you reconcile them to make the best decisions?

To maintain order and allow the best decisions to surface, people must agree on procedures to resolve disagreements, and abide by the conclusions of the procedures. At Bridgewater, the procedure they use is **believability-weighted decision making**.

**“Believability-weighted” means to weigh the opinions of people who are more believable more heavily than less believable people.** This is distinctly different from weighing everyone’s votes equally, as in a democracy.

Who are believable people? They are people who **1) have repeatedly succeeded at the thing in question, and 2) can logically explain their conclusions**. It makes sense to value the opinions of successful people more than those with little experience.

#### The Organization as a Machine

**A great manager is essentially an organizational engineer in charge of building the machine.**

*   They understand the parts in the machine (the people, the processes, the culture) like a foreman understands his tools.
*   They work hard to maintain and improve their machines.
*   They study how well the machine is doing with metrics. They compare the current outcomes with the ideal outcomes, and find ways to close the gap.
*   They worry about what can go wrong with the machine. They constantly survey the landscape to find suspicious signs of problems.
*   They study what goes wrong in the machine—either it’s a problem with the machine’s design or with the people.

The ideal is to create a machine that works so well you can sit back, barely do anything, and watch beauty happen.

#### The 5-Step Process, Applied to Organizations

Just like individuals, organizations employ the 5-Step Process to evolve and continuously improve.

1.  **Set clear goals.** Define the metrics clearly. Make sure people know what their responsibilities are.
2.  **Identify problems and don’t tolerate them.** Make it an obligation to report mistakes. Have as many people looking for problems as possible.
3.  **Diagnose your problems to find root causes.** Figure out why the machine didn’t operate the way you expected. Find out whether someone lacks the ability to do the job and needs to be replaced.
4.  **Design improvements to your machine.** Visualize the plan working, like a movie script, picturing who will do what, when.
5.  **Do the tasks required to completion.**

1-Page Summary

Ray Dalio, born in 1949, is the billionaire founder of Bridgewater Associates, one of the world’s largest hedge funds. He wrote _Principles_ to pass on his principles for living life and reaching goals.

### What Are Principles?

What are principles? **Principles are the fundamental truths that determine how you behave. They reflect your inner character and values.**

If you consistently operate by a set of principles, then you are a principled person. People know what you stand for and how you behave. In contrast, if you don’t have clear principles and have inconsistent behavior, then you’ll be seen as a “phony.” Phonies lose people’s trust and respect.

Principles help you deal with the complexity of life. Every day, you face new situations that require our response. If you had to decide what to do at each point in time, you’d react impulsively and be exhausted. Instead, your fundamental principles help you figure out what situation you’re facing and how to deal with the situation.

We all have principles. Successful people adopt principles that help them be successful.

People who share their values and principles get along. People who don’t will have constant conflicts and misunderstandings.

### Ray Dalio’s Principles

Ray Dalio’s goal is to share the principles that have worked for him throughout his life and contributed to his success.

He learned his principles the hard way, by failing repeatedly and learning from his mistakes. He refined his principles over time in an iterative loop—he set audacious goals, made mistakes, reflected and learned new principles, then set even more audacious goals. Over time, he collected a set of principles that he believes addresses pretty much any situation you can run into in life or work.

The author is adamant that **each person needs to discover his or her own principles**. Each person’s principles should be different depending on her goals and natures.

*   Dalio’s principles center around success as _he_ defines it—being an independent thinker, a successful financial trader, and working alongside a team that thinks likewise. They also center around _his_ personality and nature—someone who doesn’t like following other people’s instructions and instead prefers to figure out things himself.

Therefore, you shouldn’t take the principles in this book on faith. Instead, question his ideas, see if they make sense to you, then walk away with the principles that fit your goals the best.

### Organization of the Book

The book is organized in three parts:

1.  A **short autobiography** of how Dalio became an investor and built Bridgewater. This explains how he developed his principles.
2.  **Life Principles:** the fundamental principles with which he conducts his life and business. These are universal and can be applied to pretty much anything by anyone.
3.  **Work Principles:** the specific principles that underlie how Bridgewater operates. These build on the Life Principles. In sum, they operate as an idea meritocracy through radical transparency, believing that disagreement by independent thinkers can produce the optimal decision making.

Introduction

To help us understand how he got to his principles, Ray Dalio shares a history of his founding of his hedge fund Bridgewater Associates. He cautions that his particular story can distract from the merit of his principles, which are timeless and universal. So he advises you to skip his biography if you’d rather judge his principles on their own merit.

### Key Themes

#### Independent Thinking

To be a successful financial trader, you need to be an independent thinker. You need to 1) bet against the consensus view, and 2) be right. Aiming for this means that you’ll be wrong a lot. By making a lot of mistakes, Dalio developed a fear of being wrong, and he tried to figure out **how to approach decision making to maximize his chance of being right**.

This shifted his perspective from stating, “I know I’m right” to asking the questions, **“How do I know I’m right? What am I missing?”** Asking these questions prompted him to be relentlessly curious about why other smart people disagreed with him. He learned to get a broad range of inputs from other people, then weigh them according to how credible they were. This increased his chances of being right.

Importantly, Dalio had gone through so many mistakes and went through such painful times, that he learned not to care about whether the right answer came from him. He just wanted to be right.

#### Systematic Decision Making

Dalio found he succeeded best when he **systematized his decision-making process into algorithms** so clear that even computers could run them. This had a number of benefits:

*   It let him react faster to new situations, since he didn’t have to ponder from scratch how to react.
*   It removed emotion from decision-making.
*   It allowed computers to harness a vast amount of data, more than a human could digest, to make better predictions.

In financial trading, he was able to visualize the market as a machine, made up of individual cause-effect relationships. For example, the price of pork bellies depended on what cuts of meat consumers prefer to eat, how much grain pigs eat, and how rain affects crop yield for grains. To Dalio, this looked like a “beautiful machine” that he could model and predict prices of.

#### Operating by Clear Principles

Dalio learned that articulating clear principles helped other people see his logic and process of decision making.

Furthermore, he shares his principles with his team and invites them to test the principles. He therefore gets a chance to refine his principles and make even better decisions.

#### Working with Great People is Priceless

Dalio emphasizes that money was just an incidental product of good work. To him, meaningful work and meaningful relationships were his primary goals, and were far more valuable than money.

### Early Life: 1949-1967

Ray Dalio grew up in Long Island as an only child. His father was a jazz musician and his mother was a stay-at-home mom.

He describes his early character traits:

*   He had a bad memory and disliked rote memorization.
*   He didn’t like following instructions.
*   He was very curious.
*   He liked figuring things out for himself.

As a result, he didn’t like school, since what his teachers were teaching never seemed all that important.

But when he did develop an interest in something, he was unstoppable. He eagerly worked for money starting at age eight, delivering newspapers, shoveling snow, caddying at a golf club, and working in a restaurant. He found that independently handling money taught him far more useful lessons than school did.

In the 1960s when he grew up, the United States was on a tear. Everything seemed to be improving, and ambitious goals like space travel rallied the nation.

Importantly for Dalio’s life trajectory, the stock market was doing great, quadrupling over the previous ten years. After hearing people talk about buying stocks at the golf course he was caddying at, Dalio bought shares of Northeast Airlines because it was the only company he found that sold for less than $5 a share. He bought as many shares as he could, figuring that more shares would earn him more money. In retrospect, this was a dumb strategy, but he got lucky—he tripled his money. He thought making money investing was easy, and he got hooked on the stock market.

He started getting as many annual reports from public companies as he could and digging into them. Like many others, he tried to pick the best stocks to get the best returns.

1966 would be the stock market’s top. He would soon learn a lot of lessons about financial markets.

### College and Starting Bridgewater: 1967-1979

Dalio had a C average in high school and attended a local college, C.W. Post. But he enjoyed college since he could study things that he was actually interested in. He majored in finance and graduated in 1971 with nearly perfect grades, which got him into Harvard Business School.

#### History Repeats Itself

During this time, the United States faced social turmoil with the Vietnam War, and economic turmoil with a declining stock market and currency fluctuations. By watching the news and the market, Dalio began sensing a bigger picture and the cause-effect relationships that determine how the market moves.

For example, the summer after Dalio graduated from college, President Nixon announced that the US dollar would no longer be convertible into gold, which caused the dollar to plummet. But the next day, the stock market jumped by 4%. Dalio was confused. He spent the rest of the summer studying currency devaluations and found that this pattern had occurred in history—just not in his lifetime. There was a predictable string of cause-effect relationships that made this outcome very predictable.

As another example, in 1973, the US economy slowed, the stock market sank, and commodity prices shot up. While this was confusing at the time, in retrospect, there was a logical sequence of events:

*   The Fed overspent in the 1960s, financed by debt with easy-credit policies.
*   When the US paid back its debts with lower-value paper money instead of gold-backed money, the US basically defaulted, and the dollar took a dive in value.
*   This created more easy credit, which led to more spending, which led to inflation. This pushed commodity prices up.
*   Then, in 1973, the Fed tried to control inflation by tightening monetary policy. This then caused stocks to crash and the economy to weaken.

Even though a modern event might seem novel, it has likely happened in the past, as a result of logical cause-effect relationships. Dalio committed to **studying history broadly so he could become aware of more situations and how to deal with them, even if he had personally never seen them before**. His goal became to be able to identify what situation he was in, to understand the relationships behind them, then to predict what would happen in the future.

#### Dalio Escalates His Trading

While at Harvard Business School, Dalio took an interest in trading commodities. Unlike stocks, which could stay high or low because of public perception and trading with a “greater fool,” commodities like meat and grain represented real things that people would pay for at a grocery counter. This allowed Dalio to model the cause-effect relationships in the whole system, from how rain affects crop yield, to how much grain livestock eat, to what cuts of meat consumers prefer to eat. To Dalio, this looked like a “beautiful machine” that he could model and predict prices of.

After graduating with his MBA, Dalio worked as a commodities trader in a brokerage firm while also trading his own account. Today, he remembers his trading mistakes far more vividly than his wins. At one point, he had a big loss on pork bellies, which plummeted in value for a few days. He would hear the commodity price ticker click and clack, announcing he’d just lost another sum of money. This visceral experience taught him a **healthy fear of being wrong**, and the caution to cap his losses to avoid being taken out of the game.

Dalio was fired from his brokerage firm for being too wild (he shares that he once punched his boss in the face). But his old clients still wanted his advice, so in 1975 he started Bridgewater Associates.

Bridgewater’s service began by advising customers on how to handle market risks.

*   Notably, he helped the chicken producer Lane Processing control its feed costs with corn and soybean futures, which allowed them to provide chicken at a fixed price to McDonald’s. This reduced price risk for McDonald’s, which allowed them to launch the McNugget in 1983.
*   He also began publishing _Daily Observations_, a collection of his thoughts and research.

Eventually, Bridgewater also began to buy and sell on his clients’ behalf, earning a percentage of profits. Dalio’s ability to visualize the market as a complex machine gave him a competitive advantage over other firms who didn’t.

### The Downfall: 1979-1982

The late 1970s were one of the most volatile periods in markets in history. The fluctuations were caused by big shocks like breaking the link between the dollar to gold in 1971, the oil crisis after the Iranian Revolution, and the Fed’s monetary policy to try to control inflation.

During all of this, Dalio confidently predicted that the next depression was soon to come. He saw that debt levels were at record highs and rising faster than borrowers could repay them, particularly to emerging countries. The Fed was in a difficult position. It could print more money to avoid a cash crunch, but this would stimulate more inflation. On the other hand, if the Fed were to control inflation by becoming tight, this would trigger a massive decline in markets.

Dalio had seen elements of this before. He’d studied the past two centuries of economic history for debt and depressions. He was confident that a depression was coming, and he told his clients at Bridgewater this. To profit from his prediction, he held gold (which performs well in inflation) and bonds (which perform well in depressions).

At first, it looked like Dalio was completely right. In August 1982, Mexico defaulted on its debt, and it seemed clear that other emerging countries would follow. The Fed’s policies hadn’t been enough. Dalio’s bond bets were beginning to pay off.

Dalio looked clairvoyant for his predictions. He testified at Congressional hearings on the crisis, and he went on finance shows, claiming “I can say that with absolute certainty, because I know how markets work.” The Fed tried to ease the situation by making money more available, but Dalio predicted credit problems would only get worse, seeing analogies to the Great Depression in 1929.

He was completely wrong. The market rebounded in response to the Fed’s actions. Inflation fell, and growth accelerated. Over the next two decades, the economy enjoyed the greatest growth period in history.

Dalio lost nearly everything. He had to let go of his entire staff, leaving only himself. He had to sell their second car and borrow money from his father. After eight years building Bridgewater, he had to start from zero once again.

#### Lessons from the Crash

What did Dalio learn from this incredibly painful experience?

First, despite losing nearly everything, he knew that he wanted to continue working for himself. He didn’t want to get a job. And if he was going to succeed in going after what he wanted, he needed to reflect on the failure and change for the better.

Reviewing his actions, he found a few critical mistakes.

*   First, he had been far too overconfident and emotional in his prediction. He vowed never to feel “absolutely certain” about anything again. Instead, he would need to constantly stress-test his ideas, seeking out people who disagreed with him and understanding their reasoning. This would increase his chances of being right.
*   Second, he saw that his study of history was incomplete. Had he studied other aspects of economic history, he would have seen that central banks could balance inflation and deflation against each other as they did in this period. He vowed to study history completely and assemble a set of principles that were timeless and universal.
*   Third, he had incorrectly perceived an all-or-nothing choice in his investing—he could either pursue high returns at high risk, or he could lower risk for lower returns. He saw that a low-risk, high-return path was possible. In general, the lesson was to keep finding the best possible path instead of settling for the obvious choices available.

In retrospect, this failure was one of the best things that happened to Dalio, because it revolutionized his approach to personal improvement and decision-making, and it led to a golden era for Bridgewater.

Part 1: History of Ray Dalio and Bridgewater

Part 1-2: Revitalization to Today

There is a 5-step process for getting anything that you want out of life. It goes:

1.  Set clear goals.
2.  Identify problems and don’t tolerate them.
3.  Diagnose your problems to find root causes.
4.  Design solutions to get around problems.
5.  Do the tasks required to completion.

To achieve success, you need to follow each of these steps in order, one at a time. When setting goals, you shouldn’t think about barriers—just set the goals. When diagnosing your problems, don’t worry about how you’ll solve them—just find the root causes.

These 5 steps also form a loop. Once you complete one turn of the loop, then you’ll look at your results and go through the process again, setting new, higher goals.

It’s simple. But simple doesn’t mean easy. This sounds like common sense, but executing it day in and day out is the hard part.

We’ll break down each of the steps further.

### 1\. Set Clear Goals

To know where you’re aiming, you need to set clear goals. Here are pointers on how to do this.

**Be audacious.** If you think something’s unattainable, that’s only because your _current_ knowledge is limited. Once you start trying to achieve your lofty goals, you’ll learn a lot. Paths will emerge that were inconceivable to you before.

*   On the contrary, if you _know_ you can achieve your goal, you’re not aiming high enough.
*   Remember, follow the 5 steps in order. Set your goals first without worrying about the obstacles you’ll run into.

Each of us has goals and desires. Goals are what we want rationally, while our desires are what we want on a passionate or emotional level. (Shortform note: At times, the two conflict—losing weight is difficult for lots of people because our goal is to be in perfect health, but we also desire food.) But when your goals align with your desires, it becomes easier to achieve your goals.

**Choosing what NOT to do is often as important as choosing what to do.**

*   You can have just about _anything_ you want, but not _everything_ you want. People are often afraid to close down options for themselves, and as a consequence they chase too many goals at once. This spreads their attention then, and they achieve few of their many goals.
*   Instead, reject good alternatives to pursue even better ones.

Don’t confuse goals with tasks. The goal is the outcome you ultimately want to achieve. The task is merely what you need to do to get there.

If money comes up naturally as a top goal for you, be wary of setting money as a primary goal.

*   To Dalio, meaningful work and relationships make you much happier than money does. There are only so many things that money can buy, and great relationships are not one of them.
*   Start with your real non-money goals, then work your way backwards into the money you need.
*   Dalio argues having the basics—a good bed, good relationships, good food, good sex—is most important and don’t get much better when you have more money.

### 2\. Identify Problems and Don’t Tolerate Them

#### Overcoming Your Ego

Problems are painful. Your ego and your desire for comfort get in the way of recognizing problems. Many people are afraid to highlight their weaknesses, and thinking about problems makes them anxious.

To overcome this hesitation, realize **what happens if you don’t recognize problems—you’ll set yourself much further back from your goals**. While thinking about problems may worry you, _not_ thinking about problems should make you even more worried.

Weaknesses don’t matter if you find solutions for them.

If you want to accomplish great things, you need to push yourself to your limits. If you push yourself to your limits, you will fail a lot. These failures hurt, but the important thing is acknowledging your weaknesses and finding some way to fix them or compensate for them. Unsuccessful people don’t do this.

You need to recognize problems for what they are—opportunities for improvement.

*   View life as a game that throws challenges at you that you must struggle with and overcome.
*   Acknowledging your problems is not the same as surrendering to them. You will find ways to get around problems.

Think of yourself as a machine, feeding in resources and information, and producing outcomes. Viewing yourself top-down like this helps with objectivity.

*   Imagine your air conditioner is broken. Would you tolerate that? Or would you try to find the problems? If you wouldn’t tolerate a broken air conditioner, why should you treat yourself differently?

People who succeed look at themselves unflinchingly. They understand their weaknesses objectively, rather than shying away from them.

#### Finding Problems

Be specific about what the problem is. The more precise you can be about what the problem is, the better the solution you can design.

*   Start from the symptom instead of poking at root causes. “I can’t get enough sleep” is not a problem. The symptom is “I’m performing poorly at work.”

**Be clear about what problems are big and what problems are small.** Invest your energy in problems that will get you the biggest returns, just like how you would invest your money. But also make sure small problems aren’t symptoms of big problems.

Hold yourself accountable for problems. **Every failure is _your personal_ failure**—this means you weren’t creative or flexible or determined enough to do what it takes. You need to get better to find the way to succeed.

Once you identify your problems, **have zero tolerance for your problems**. If you don’t care enough to solve your problems, or if you don’t have the will to solve it, then your situation is hopeless.

### 3\. Diagnose Problems to Find Root Causes

Root causes are the most fundamental cause of the problem. Often, there can be a chain reaction of problems. Your immediate (or proximate) problem might be that you feel tired at work because you don’t sleep long enough. But the root cause is deeper than this—you might not sleep long enough because you lack discipline in keeping your sleep time and get distracted by your phone.

Using a medical analogy, **your problems are symptoms, and the root cause is the disease**. To stop your symptoms, you need to cure the disease. Likewise, to be able to truly solve your problems, you must identify the root cause.

Again, take this step in order, by itself, without worrying about other steps. **Focus on what the problem is and what caused it, before worrying about how to solve it**.

#### Tips on Diagnosing Problems

There are a few questions to ask yourself to get at root causes.

*   Why didn’t things go as they should have?
*   Ask Why? five times to get at root causes. This will get you to deeper layers of understanding.
*   Is the root cause a pattern?

Rely on other people to look at yourself objectively.

*   Speak with credible people and look at the evidence together.
*   Get other people comfortable with pointing out your mistakes. Make clear they’re not going to hurt you.

Often your problems have to do with bad personal habits. These are important. **If you can rid yourself of your top three harmful habits, you will radically improve the trajectory of your life.**

Take time to diagnose problems. Definitely take more than 15 minutes. Sometimes it can take hours (but most people don’t spend hours really diving into their problems).

(Shortform note: There are more tactics on this step in the Work Principles section on the 5-steps.)

### 4\. Design Solutions to Get Around Problems

Before you jump to solving problems, look backwards in time. Replay the story of what you have done to get you in your current position.

Then look down on yourself objectively, like a machine, and find changes to produce better outcomes.

*   Say you have a problem with distraction and you check your phone every 10 seconds. Now think of a machine that has the same problem. **Would you tolerate a microwave that shuts off every 10 seconds to check its phone?** If not, why would you tolerate this in yourself?

Next, visualize what you need to do to get around the problems. Literally visualize it—think of what must happen at what times to reach your goals.

*   Think of your plan as a movie script, with people playing roles at specific times.

To build out your plan, drill down from high level to specific tasks and timelines. Start from high level and drill down into low-level details.

Write down your plan for everyone to see and measure your progress against.

### 5\. Do the Tasks Required to Completion

Once you have your plan, you need to execute it. You need the discipline to act out your script.

**Have good work habits. Prioritize your to-do lists, and tick them off in order.**

Measure your progress by setting clear, well-defined metrics. If you aren’t meeting your metrics, that’s a problem that needs to be diagnosed and solved.

To keep up your motivation, remember the goals you want to achieve, and how your plans will help you achieve those goals. If you lose sight of this “why?” you will lose sight of your goals, and you will lose motivation in your plan.

---

Those are all five steps. It sounds simple. But simple doesn’t mean easy.

### Executing the 5-Step Plan

Here are more suggestions on how to execute the 5-step plan.

**Follow the five steps in order.** If you go out of order, you won’t execute each step to its fullest potential.

*   As you set your goals, don’t worry about how you’re going to achieve them. Don’t dampen your ambition based on what you know you’re capable of achieving _today_.
*   As you diagnose your problems, don’t worry about how you’re going to solve them yet. Don’t shy away from recognizing big problems just because you don’t know what to do about them.

No one is great at all 5 steps. Some creative people can’t execute; some people find it hard to diagnose their own weaknesses.

*   Find which steps you fail at.
*   Then get rid of that weakness. You can either get better at it yourself, or find other people who can help compensate for your weakness.

As you go through the steps, visualize your success to stay motivated. Even while you struggle to achieve success, you can crave the thrill of success. You can also visualize the tragic results if you fail to push through.

Part 2: Life Principles | 2-1: The 5-Step Process

Try stepping through the 5-step process to get what you want.

Exercise: The 5-Step Process

As a result of his mistakes, financial and otherwise, Dalio learned that he made the best decisions when he put his ego aside and relentlessly sought the truth. This meant adopting a number of mindsets: acknowledging his own weaknesses, being open to others’ opinions, constantly asking what he was missing, and stress-testing his ideas.

**This is probably the strongest theme of the book, and the biggest barrier people have to making better life decisions.** Most of Dalio’s principles can be seen as springing from this root. Much of the book is about understanding the importance of finding the truth, and how to achieve it over common obstacles.

### Introduction

Don’t fall in the trap of wishing that reality were different. This gets you nowhere.

Instead, embrace your reality and deal with it. You must be **radically open-minded to the possibility that you are wrong**.

Don’t get hung up on how things ‘should’ be. This will bias your objectivity.

If you think something is morally wrong, assume that _you’re_ wrong and figure out why what nature is doing makes sense.

*   For example, picture a pack of hyenas killing a young wildebeest. This feels wrong, but on reflection it’s clear this is good for evolution of the wildebeest and for the total system.
*   Nature optimizes for the whole, but people narrowly judge good and bad based on how it affects the individual.

To deal with the emotional pain of finding truth, see life as a game, where the object is to get around a challenge and reach a goal.

What holds a lot of people back from the truth is their ego. Many people’s egos center around being right and looking smart. But everyone is wrong a good portion of the time, and ignoring this is blinding yourself to your mistakes and ways to improve yourself.

**Instead of declaring “I’m right,” ask, “_How_ do I know I’m right?”** You can’t be sure of anything—there are always risks that can hurt you badly, even in the safest-looking bets. **Always assume you’re missing something**

### The Two Barriers to Recognizing Reality

There are two barriers that get in the way of seeing reality: your ego, and your blind spots.

#### 1) The Ego Barrier

The **ego barrier** is your desire to be capable, and to be seen by other people as capable.

We have underlying biological needs to be loved, to feel important, to be praised by others. We also have fears—of losing love, of being irrelevant, of being criticized by others.

Experiences that threaten the ego are painful. Finding out that you had poor judgment and made a huge mistake is painful. Having your weaknesses pointed out to you is painful.

People often find this pain unbearable, and they go out of their way to avoid this pain. They might shut themselves off from self-reflection, or they maintain denial about reality.

**Don’t avoid pain—reflect on it and savor it.** Pain highlights a learning opportunity that can make you stronger and avoid similar situations in the future.

#### 2) The Blind Spot Barrier

The **blind spot barrier** materializes when we see the world through our own biased lenses.

For example, some people only see big pictures and miss small details, while others are the opposite. Some people are linear thinkers, and others are lateral.

You can’t appreciate what you can’t see, any more than a color-blind person can grok what color is.

Thus two people who see the world very differently often end up arguing over who’s right without understanding their own blind spots.

**The solution to both the Ego Barrier and the Blind Spot Barrier is radical open-mindedness**, discussed in more detail below.

### There are Two “Yous”

When you think about yourself, you probably only picture the smart, rational, planning self.

In reality, there are two “yous” that fight to control you:

1.  The lower-level emotional, often subconscious “you”
2.  The rational high-level, logical, conscious “you”

The lower-level you exists as a result of evolution, in a part of the brain called the amygdala. It produces automatic responses to what it receives. For example, an animal doesn’t decide to fly or hunt—it simply follows instructions from that part of the brain. The amygdala drives our motivations and actions through emotions. This is where the ego barrier resides.

The higher-level you is a more recent evolution unique to humans. The rational you must overcome the lower-level ego barrier.

#### The Two Yous Fight

**The “two yous” fight to control you. The conflict is between what you desire and what is actually good for you.**

The conscious rational you can know that understanding your weaknesses and facing failure is the best, but the subconscious emotional you makes you shy away from it to protect your ego.

If you get angry at yourself for breaking a plan—like failing to keep up with a diet or exercise, or procrastinating on work—this is the rational you fighting with the emotional subconscious you.

Since the two occupy different parts of your brain and don’t cross-talk often, it can be really hard to consciously explain your subconsciously driven emotions and actions.

#### Amygdala Hijackings

Often, **the subconscious you hijacks your brain and actions, and the conscious mind needs to refuse to obey its instructions**. If you react spontaneously and emotionally without thinking, that is your subconscious you in control.

To stop this, you need to recognize the warning signs when this happens—your heart rate increases, your breathing gets more intense. These are sympathetic nervous system reactions. When you recognize this happening, you should trigger an escape plan to get out of this hijacked state, so the rational you can get control again.

Afterward, consciously reflect on what causes the amygdala hijackings. Train the subconscious you the same way you would teach a child to behave—with loving kindness and persistence.

Funnily, **when you talk to someone else, your “two yous” are dealing with _their_ “two yous.”** So you can be having one of four conversations, without realizing which one you’re having. Your subconscious you might be talking to the other person’s rational you, or vice versa; or both of your subconscious emotional yous are battling with each other. No wonder misunderstandings and arguments are so common.

#### The Two Yous Can Work Together

Yet the best ideas and decisions may come from the cooperation of the two yous, not when the rational you completely subjugates the subconscious you.

For example, sometimes the greatest inspiration “pops up” from our subconscious. These happen most often when you’re relaxed and not consciously forcing yourself to come up with great ideas. The conscious logical mind then examines the ideas for how good they are.

Dalio personally likes transcendental meditation to connect the conscious to the subconscious.

### Embrace Your Mistakes

Recognizing your mistakes and feeling the pain is critical to finding the truth. Here are concepts that help you get past the ego barrier.

Mistakes happen all the time. **It’s more important to recognize mistakes and learn from them, than to cover them up and make your problems worse.**

*   Parents and schools overemphasize the value of having the right answers all the time. The best students in school tend to be the worst at learning from mistakes, because their ego is centered around being right and mistakes are painful to them.

**Pain is OK. It’s nature’s reminder that there’s something to learn.** Dalio sums it up in his equation, **“Pain + Reflection = Progress”**

*   Develop a reflex for reflecting on pain, rather than avoiding it. When you make a mistake, relish the chance to get better, rather than being ashamed about it.
*   Pain is a necessary part of getting stronger. To gain strength, you have to push against your limits, which is painful. If you’re not feeling pain, you’re probably not being aggressive enough with your goals.
*   Even in the most painful situations, you usually have the strength to go on. Research shows that people who embrace huge setbacks, such as losing a job or having a limb amputated, end up just as happy or happier than they were before.

**Don’t blame bad outcomes on anyone but yourself.** Take full responsibility for mistakes, so that you don’t gloss over them and ignore the learning opportunity.

*   Imagine you’re learning how to ski when you fall down. How silly would it be to criticize your ski instructor for not shifting your weight properly for you?

**Treat each mistake like a puzzle that, after you solve it, reveals a gem.** Each gem continuously makes you stronger, and more gems help you ascend to higher levels of play where the challenges get greater.

*   Think about this like a game, where you progressively collect equipment and tools and get stronger.
*   Instead, if you refuse to improve yourself, you will be stuck at the same level for a long time. If you look back on your past self and aren’t embarrassed by how dumb you were, you haven’t learned much.

As powerful as you think your brain is at designing the right solution from scratch, it’s possible that adaptation through trial and error is even more powerful.

*   As a biological analogy, viruses that don’t have a brain adapt at a rate that far outpaces mankind, even despite all of man’s conscious thinking.

#### Improving Yourself is Life’s Greatest Reward

**We have evolved to crave self-improvement.** Why do we feel this? Like most biological behaviors, this feeling is likely better for the survival of the individual and the species. Organisms that constantly felt the desire to improve themselves and push their limits likely succeeded above organisms who were content being in stasis.

It’s not always clear that you’re striving for self-improvement. When you work each day and set goals for yourself, you may think that you’re striving for material rewards, like more money or a bigger house, and that these rewards will make you happy. But in reality, **the real prize that gives you the _most_ satisfaction is getting better**.

The prizes you’re chasing after are just the bait. Chasing after them forces you to struggle and evolve, which is the real goal. Dalio notes that, ultimately, achieving more does not improve your life significantly. Beyond the basics like shelter, relationships, and food, the benefit of the marginal improvement drops off quickly. But the struggle makes you stronger, and _that_ delivers satisfaction.

Evolving and getting stronger helps you ascend to higher and higher levels, allowing you to tackle bigger challenges. What once seemed impossibly complex becomes simple.

Because the struggle for self-improvement is so fulfilling, don’t deprive other people of their chance to struggle. Deny them what they want to give them the opportunity to struggle, which will lead to strength. This is why Dalio plans not to leave too much money to his descendants, beyond covering the basics.

#### Examples of Embracing Mistakes

##### The Hero’s Journey from Joseph Campbell

Heroes start as ordinary people who are drawn by a call to adventure. This leads them down a road of trials with battles, successes, and failures.

They gain special powers over time, become increasingly successful, and this leads to larger battles.

They experience one very big failure (“abyss”) that tests their resilience; if they make it through, they undergo a metamorphosis.

They ultimately get the largest reward (the ultimate boon) which is special knowledge about how to succeed, earned throughout the journey.

(Shortform note: find more about this in [our summary of Joseph Campbell’s The Hero with a Thousand Faces](https://www.shortform.com/app/book/the-hero-with-a-thousand-faces).)

##### Dalio’s Biggest Failure

Dalio’s most painful failure came in 1982 during the Latin American debt crisis. He believed Mexico’s default was just the beginning of a depression, and he predicted this was an “absolute certainty.” To his surprise, loan restructurings and the Fed’s actions caused a resurgence in the economy.

Dalio bet incorrectly and lost pretty much everything, including his employees. He felt like he was back in 1975, starting Bridgewater from the beginning.

##### Mistakes at Bridgewater

If you’re an employee at Bridgewater, each time you make a mistake, you’re responsible for adding it to an “error log.” **If you log your own mistake, you’re OK; if someone else logs it for you, you’re in big trouble.**

Dalio notes that plenty of people at Bridgewater make very costly mistakes. A common corporate reaction is to fire these people, but Dalio thinks this is a huge mistake since it just encourages people to hide their mistakes. Instead, reflecting on mistakes as a team and striving to do better is the best way to handle mistakes.

Part 2-2: Embrace Reality and Relentlessly Find the Truth

Endure the pain of reflecting on your mistakes to improve for the future. Remember, Pain + Reflection = Progress.

Exercise: Reflect On Your Mistakes

To recognize the truth, **you must accept that you are wrong and relentlessly find ways to increase the chances that you are right**. Dalio calls this **radical open-mindedness**. Taking in more information, especially from other highly credible people, can only allow you to make better decisions, which will bring you closer to your goal.

We’ll cover a variety of themes and mindsets stemming from this concept.

#### You Are Blind

**Understand that you are blind, and that you need to figure out a way to see.**

Pain from mistakes is how you learn that you are blind. Review bad decisions that you made because you failed to see what others saw. Ask others to help with figuring out your blind spots.

Recognize the importance of this mindset. **If you _willingly_ blind yourself and keep doing something wrong, you will never maximize your potential.**

Even if you believe your baseline probability of being right is already high, **it is always valuable to raise your probability of being right.** And being open-minded to other viewpoints is how you raise your probability of being right.

#### Get Good Ideas from Other People

Accept the possibility that others might see something better than you and point out threats and opportunities you don’t see.

People who make the best decisions are rarely confident that they alone have the best answers. What is the probability that, with your one brain, you have the best answer that can’t be improved by the other seven billion people on earth?

You’re looking for the best answer that exists, not simply the best answer that you can come up with yourself. **The probability of your always having the best answer is very small.**

But don’t just trust every opinion you get. Weigh a person’s opinions by how believable they are about the subject. This is the idea of “believability-weighted decision making,” which we’ll cover later.

If multiple believable people say you’re doing something wrong but you don’t think you are, you’re probably biased.

#### Don’t Worry About Producing RIght Answers

A common problem, especially among high achievers, is wanting to be the one to produce the correct answers. Our environment stresses this—parents and schools want you to have the right answers on tests and be the one producing the bright ideas.

But taken too far, this mindset can make you close-minded to other ideas and what other people have to offer.

**If you value being right and having the best ideas above all, you shouldn’t care if the right answer comes from you or from someone else. Focus on finding the truth and the best ideas.**

#### Mental Maps x Humility

Chart yourself on two dimensions: 1) humility and open-mindedness, and 2) mental maps, or what you know and how you reason.

Many people have low values for both, and they remain trapped there. They know little, yet they are convinced they know everything. (Shortform note: This is similar to the [Dunning-Kruger effect](https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect), a cognitive bias where people who are bad at something are incapable of recognizing how bad they are.)

The other quadrants are also suboptimal. If you have high open-mindedness but poor mental maps, you will have problems picking the right people and ideas to follow.

If you have good mental maps but low humility, you miss out on better ideas, and you leave a lot of value on the table.

#### Hallmarks of Close-Minded People

Unfortunately, many people are close-minded, and they aggressively seek to close themselves off to better ideas. Here are characteristic behaviors of close-minded people:

*   They get angry when someone disagrees with them.
*   They want to be proven right more than they want to learn other perspectives.
*   They make statements more than they ask questions.
    *   Deceptively, some close-minded people make low-confidence statements like “I could be wrong, but…” They’re trying to signal open-mindedness, but really they’ve already entrenched around their opinion.
*   They’re unable to hold multiple points of view simultaneously in their minds. They can only process one viewpoint at once, and often they hang onto their own viewpoint the strongest.
*   They find it embarrassing not to know something. They tend to be more concerned with appearances.

In contrast, open-minded people behave in exactly the opposite ways. They welcome when other people disagree with them; they ask thoughtful questions; they openly admit when they don’t know something and show an eagerness to learn.

#### Addressing Common Issues

Some people worry that seeking ideas from other people means losing assertiveness. This is totally false. In reality, getting ideas from others will make you right more often; in turn, **being right more often will make you _more_ confident**.

Some people try to be open-minded, but in reality, they’ve already made up their mind before they seek outside opinions. Then, they simply gather information to confirm their prior opinion, instead of opening it up for change. Do NOT settle on an opinion before getting information.

Some people hesitate to get other opinions, saying, **“I want to make up my own mind.” This is foolhardy—**opposing views shouldn’t threaten your ability to decide independently. It can only make you more accurate and give you more options to make up your own mind.

#### Tactics of Radical Open-Mindedness

**When accepting viewpoints from others, suspend your judgment and empathize with their viewpoint.** Do not punish others for speaking their mind, like criticizing or mocking them. Make clear you want to understand their perspective and aren’t trying to prove them wrong. After all, they have their own egos to contend with.

Recognize when you’re being close-minded. You’ll feel tense, reactive, and emotional. Use this to trigger responses of calming down and slowing down. While this is difficult at first, practice this over time and it will become a habit.

Review instances when you made mistakes because you had incomplete information or suffered from blind spots.

Before making a decision, ask yourself, “Can I point to clear facts leading to my view?” If not, you’re merely trusting your gut, which is unlikely to be correct.

### Thoughtful Disagreement

Being open-minded will make you seek other smart people and explore their viewpoints, especially when you disagree with each other. This may create conflict between the four Yous in the conversation.

The key is to have “thoughtful disagreement” with the other person. **This means your goal is not to prove that you’re right, but rather to find out which view is true and decide what to do about it.**

Your ego may get in the way of getting new perspectives from other people. But if you care about your goals, you should be more afraid of missing important ideas than being proven wrong. **What stings more—being wrong about something, or ultimately failing your goal?**

Thoughtful disagreement doesn’t mean just taking in other viewpoints by faith, without articulating your viewpoint. **You should be open-minded and assertive at the same time**. You must see things through the other person’s eyes, while communicating clearly how _you_ see things. The best ideas will arise from this natural tension.

As you seek out more opinions, you may find that people will be naturally reluctant to disagree with you. This might be because they’ve been trained to agree to maintain social cohesion, or because they want to avoid emotional explosions. The trick is to engage in thoughtful disagreement without triggering emotional explosions.

#### Tactics for Thoughtful Disagreement

*   Find the most believable people in the area of concern, and listen to their thoughtful disagreements. Then find other smart people and triangulate the opinions you’ve heard with them. You will get a broad set of opinions and increase your chance of finding the truth.
*   Ask questions rather than make statements.
*   Don’t see suggestions automatically as criticisms of you.
*   Focus more on the substance of what is being said, rather than the style of it. Even if the other person says something somewhat sarcastically or in a tone you don’t like, try to focus on the core of what is being said.
*   Describe back to the other person their own perspective to make clear you understand it.
*   Discuss calmly and dispassionately, and remind the other person when the disagreement gets too emotional.
    *   Ask questions like “would you like me to be open with my thoughts, or keep them to myself?”
    *   “Are we trying to figure out the best option, or are we trying to fight for our own point of view?”
*   If you start talking over each other, engage the two minute rule—each of you can call a short period to get your main thoughts out without interruption, while the other person has to stay silent and listen.
*   If you can’t agree, find a person you both respect to moderate.

Part 2-3: Radical Open-Mindedness

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).

### Top-Down vs. Bottom-Up

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**.

### The Machine of Nature

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.

### The Machine of Your Life

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.)

#### Design the Best Team

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?

#### Design the Rules for Your Machine’s Decisions

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.)

### The Machine of Economics

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:

*   Academic economists typically see supply and demand as bulk quantities sold, and they measure demand as the total amount spent. Instead, Dalio prefers to look more granularly at who they buyers and sellers are, and why they buy and sell.
*   Bridgewater detected a debt crisis in Europe around 2010. Policymakers in Europe didn’t understand granularly who the borrowers and lenders were, and how their abilities to borrow and lend would change with market conditions. They saw investors as a single “market” that could be influenced with large pushes.

Like all good systems, economic systems are naturally self-correcting.

*   If there’s too much supply in a market, prices will go down, some companies will go bankrupt, and supply will reduce to meet demand. All this happens without a central coordinator deciding what to do.

Part 2-4: Visualizing Complex Systems as Machines

Try to view yourself top-down as a machine to see what needs improving.

Exercise: See Yourself as a Machine

Cooperation is natural in human history. Humans evolved to support cooperation, allowing groups to accomplish more than individuals. Cooperation led to the development of values such as altruism, morality, and honor.

**To accomplish your goals, you need to rely on other people.** You need to be humble and recognize that you lack both the objectivity and the complete skill set to achieve all of your goals. Instead, other people will 1) help you see your blind spots, and 2) provide complementary skills to cover for your weaknesses.

#### Other People See Your Blind Spots

You will never be able to view yourself objectively most of the time. As we learned, often your ego will get in the way and bias you. In other cases, you might simply be blind to certain aspects of yourself.

**You should get others to be radically truthful with you so you can see the truth about yourself.** As founder and CEO of Bridgewater, Dalio had complete authority to do things his way, yet he willingly built himself a management committee to oversee him. He knew that relying on others was the best way to arrive at the truth.

To get the most out of other people’s viewpoints, practice thoughtful disagreement, as discussed in the previous chapter.

*   Seek out the smartest, most believable people in the area of concern. Especially find people who disagree with you so you can understand their reasoning.
*   Afterward, find other people who disagree with the people you just talked to. Listen to _their_ thoughtful disagreements.

#### Other People Complement Your Weaknesses

You will never be able to be proficient at all the things necessary to reach your goals. Be humble about this.

_Nobody_ can be proficient at everything. Do you think Einstein was a great basketball player? Probably not. Despite his strengths, Einstein was incompetent at a lot of things. Do you think less of him for not being able to make free throws? If not, then you shouldn’t think poorly of yourself for having weaknesses.

**Don’t be upset if you find you’re bad at something—be _happy_ you found out**, since this will improve your chances of meeting your goal. When you find a weakness, you can deal with it. This is a better situation to be in than to be blind to your weaknesses.

Once you find your weakness, figure out whether it’s something you should improve yourself or something you should get others to help you with. You can try to work at your weaknesses, but sometimes it’s just inconsistent with your nature. For example, some visionaries are bad at execution and details, and trying to get better can only take them so far. In cases like these, it’s probably better to ask others to fill the gap so you can focus on where you’re strong.

(If you do want to work on your weaknesses, Dalio recommends doing mental exercises, which are just like physical exercises for the mind. This includes reflecting on your painful mistakes and deliberately practicing the things that are currently uncomfortable for you, such as being more or less talkative or following through on your plans.)

### People are Wired Very Differently

A key part of working with others is figuring out how you all behave and think differently.

Through a combination of genetics and environment, people come to think in very different ways. **People who think very differently have trouble understanding each other** and often ignore the value of what they don’t have. Here are a few examples:

*   Abstract thinkers think literal people have no imagination. Literal people think abstract people are pedantic philosophers.
*   Extroverted people love talking out ideas. Introverts prefer thinking privately and sharing after they’ve grappled with a problem. They often misunderstand each others’ intentions in meetings—extroverts can think introverts are unopinionated and passive; introverts may think extroverts are loudmouths and ramble too much.
*   Planners like sticking to a plan, but they can be seen as rigid and slow to adapt. Perceivers change direction often based on new information, but they can be seen as impulsive and unpredictable.

It’s hard enough to know what type of person everyone else is. Compounding this problem, **people often don’t know which type of person _they_ are themselves**. This leads to all sorts of misunderstandings and conflicts.

#### Figuring Out People Types

To learn how other people think and behave, you need to adopt the right mindset. **Be curious: you should _want_ to understand how people who see things differently came to see them that way**. Instead of getting frustrated with people and the choices they make, realize they aren’t intentionally acting in a counterproductive way—they’re simply making the best decisions they can based on how their brains work. If you had exactly the same brain and the same set of experiences as the other person, you would probably believe in the same things and behave the same way.

Next, **understand the strengths and weaknesses of yourself and other people to get the best results out of everyone.** People with complementary strengths do better work together than separately. For example, a visionary and an executor can accomplish more together than each can individually.

*   Managers who don’t understand people’s thinking styles won’t understand how their team will behave in different situations. This is like a construction foreman not understanding how his equipment works.
*   Instead, see yourself as the conductor of an orchestra. You bring in people at the right moments and in the right balance to execute your vision.

How do you actually figure out people’s personality types? Ray Dalio is a big fan of **personality assessments**. Here are the assessments he mentions in _Principles_:

*   Myers-Briggs Type Indicator
    *   This assesses a person’s position along four axes: Introversion/Extraversion, Sensing/Intuition, Thinking/Feeling, and Judging/Perception.
*   Big Five
    *   This assesses a person’s position along five factors: Openness to experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism.
*   Workplace Personality Inventory
    *   This assesses traits of persistence, independence, stress tolerance, analytical thinking, achievement orientation, and concern for others.
*   Team Dimensions Profile
    *   This categorizes people into different profiles: creators, refiners, advancers, executors, and flexors.
*   Stratified Systems Theory
    *   This studies the level of complexity at which people perform best. Some work best in transactional roles, focusing on executing daily items and acting in the present. Others work best on high-level strategy over long time horizons and deal with high uncertainty. Others work best in between at a supervisory level, developing the plans that the transactional levels execute.

#### Understanding People With Their Types

Taking the results of a person’s personality assessment, you could then **combine traits to form an archetype about the person**. This might include the head-in-the-clouds Visionary, the impractical Artist, the tidy Perfectionist, the Wise Judge, the reliable Bedrock, and so on.

Ray Dalio takes archetypes a step further with his baseball cards tool, which describes at a glance how a person thinks and behaves. Each baseball card assigns attributes like “conceptual,” “creative,” and “determined.” It also assigns tendencies for behavior, like “holds others accountable” and “pushes through to results.”

Combined with the person’s archetype and personality assessment, the baseball card gives a clear narrative of how the person will behave, and how they fit into a team. For example, a person might have a Myers-Briggs type of S (for Sensing, meaning more concerned with concrete details) and a J (for Judging, meaning more structured and orderly). She might also have an “executor” archetype. It’s then clear what this person is best suited for—conscientious execution of detailed plans.

**Once you understand yourself and other people to this level of detail, you can form a dream team of people with complementary strengths.** (Shortform note: Dalio does not go so far as to describe the ideal composition of a team, or how different people of different types should work with each other. This level of detail might have been out of scope of this book.)

#### Characteristics of Shapers

In the book, Dalio describes in detail one particular archetype that he believes he fits into: the “shaper.” The shaper comes up with unique and valuable visions and builds them out, despite the doubts of others.

Dalio realized his archetype when he was transitioning out of his CEO role, and he asked his lieutenants what his unique skill was. They answered it was “shaping.” He also believes other founder-entrepreneurs like Steve Jobs, Jeff Bezos, and Elon Musk fit this archetype.

Shapers have these qualities in common:

*   Their baseball card reads: Visionary + Practical Thinker + Determined
*   They are independent thinkers verging on rebelliousness.
*   They don’t let anything stand in the way of achieving their goals.
*   They are resilient and gritty. Their need to achieve is stronger than the pain they experience.
*   They have strong mental maps of how things should be done.
*   They test their mental maps and change them to make them work better.
*   They have a wider range of vision than most, seeing both big picture and granular details.
*   They are assertive and open-minded at the same time. They are creative, systematic, and practical at the same time.
*   They are intolerant of people who work for them who aren’t excellent.
*   Nothing ever feels good enough, and this gap is both a tragedy and a constant source of motivation.
*   They generally have low ranking on “concern for others”—largely because when faced between achieving their goal and pleasing others, they choose their goal every time.
*   They sustain success over decades with continuous innovations and successes, rather than selling their company once for a lot of money (Dalio calls these “inventors”) or entering existing organizations and leading them well.

Dalio doesn’t have any value judgment on whether shapers are more important or valuable than other types. He just classifies himself as one and believes other founders of large companies tend to be them too.

Part 2-5: Rely on Others

Understand yourself and other people to form your dream team.

Exercise: Understand People Types

After you collect information, how do you make the best decisions for yourself? While each decision has unique particularities, Dalio describes general principles to take into any decision.

There are really only two steps to making a decision: 1) learning, and 2) deciding.

### Learn Well

The foundation of decision-making is gathering the best information possible. To do so, you need to be radically open-minded and have thoughtful disagreements with people (both of these ideas are discussed in previous chapters).

To make sense of all the information you receive, you need to use each piece of information appropriately.

*   Don’t treat all information equally. Some issues or facts are more important than others. Some people are more believable than others in a given topic area.
*   Don’t mistake opinions for facts. Some people state their opinions as though they were facts, even though they have little justification for their confidence.

#### Understand the Situation

Synthesize a good understanding of the situation that you’re making a decision for. This often means understanding the current performance level, as well as how that level has changed over time.

*   For example, let’s say you’re figuring out what to do for your business that isn’t generating enough sales. You need to understand the current level of sales, as well as how the sales rate is changing over time.
*   Some people look at an improving metric and are satisfied with the way things are, without noticing that it’s not improving _quickly enough_.

Focus on a “by and large” general level of understanding. Don’t get obsessed about details that don’t really matter. Don’t focus on edge cases or whether something is “totally true.”

*   Use the 80/20 rule: what 20% of factors yield 80% of the outcome?

#### Levels of Detail

Understand the situation at multiple levels of detail. There is a top level of the most important points, as well as lower levels of supporting detail. Whenever you make a decision, you should be clear what level of detail you’re on.

For example, here are levels of detail for someone who’s deciding about a career:

*   High level, big picture: I want to do work that provides personal meaning and lets me engage directly with people.
*   Supporting picture: I want to become a doctor.
*   Subpoint: I need to get into medical school.
*   Sub-subpoint: I need to get a good GPA in college.
*   Sub-sub-subpoint: I shouldn’t go out and party tonight; I should study.

The lower levels of detail support the higher levels and form a complete logical picture. It’s important to see these different levels, rather than seeing all the points as a random pile of facts with no greater logic.

If this sounds like a foreign concept, realize that you navigate between different levels all the time without consciously realizing it.

To get better at navigating between levels, consciously think about what level you’re at in daily life. For example, if you’re in a conversation, make clear with the person you’re talking to whether you’re talking about main points or sub-points. It’s common for conversations to get derailed when they plunge deep into the weeds in details, without surfacing back up to the main points.

### Decide Well

Once you’ve gathered your information, you can make a decision. Here are principles for making good decisions of any kind.

#### Systematize Your Decision-Making

What hurts good decision-making the most is emotions. **To avoid having your emotions bias your decisions, figure out the criteria underlying your decision-making, then automate the decision as much as you can.**

We’ve learned that principles are the core of how you behave. Principles are fundamental truths that allow you to make better decisions quickly. When you recognize a situation as “another one of those,” you can just refer to your rules as a shortcut to good decision-making.

Ideally, you can convert your principles into algorithms and have the computer decide alongside you. Here’s how:

*   Think through your principles for making decisions.
*   Write them out in both words and algorithms.
*   Back-test your algorithms with previous data to make sure they would have made good decisions in the past.
*   Use the algorithms in real time, in parallel with your thinking brain.

(Shortform note: If it’s unclear what algorithms are, think of an “if-then” statement. For example, “If I receive enough money to pay my bills, I will save 20% of what remains in my retirement account. If I don’t, I will pay my highest interest bills first, then try to cut down my spending.” Having clear rules like this gives you an easy way to make decisions without thinking hard, from scratch, each time.)

Here are a few examples of how Dalio and Bridgewater automate decision-making:

*   Dalio began by writing down his decision-making criteria for trading, so that when he closed the trade, he could reflect on how well the criteria worked. He would backtest these trading rules over a century of data in every country available.
*   Bridgewater started using computers in the late 1970s to automate trading criteria and produce trading decisions in response to the environment. Indicators would catch shifting fundamentals and trend-following filters would confirm price movements.
*   He’s started automating management and human relationships through tools like recording all meetings, the “dot collector,” and the pain button (more on these tools later). Computers can take in data points about people and figure out how to get the most out of people for each project.

Remember that **good principles are timeless and universal**. Have respect for history—what you see as a situation now may not have happened before in your lifetime.

*   Example: In 2008, Bridgewater had a “depression gauge” that indicated a bursting point to the debt bubble, since the costs of debt servicing were outpacing projected cash flows, and interest rates were so close to 0 that the Fed couldn’t reverse the downturn. Dalio studied history and read the newspapers from the time, day by day, through the Great Depression and the Weimar Republic to compare what was happening then with what was happening now. This confirmed that his principles on depressions were valid.

Between people, the principles are the true basis for disagreements. Rather than argue about the conclusions both of you have, argue about the principles that each of you used to arrive at your conclusions. If both of you agree on the principles, then you should also agree on the decision.

#### Never Take the First Available Option

Sometimes it appears you’re between a rock and a hard place. You only have a choice between two difficult options, or they each trade off something that is unnegotiable.

In these situations, instead of taking either difficult option, look harder for a novel solution that you haven’t found yet. **You might be able to create a better solution that lets you have your cake and eat it too.**

Here are examples of how Dalio was able to find an optimal solution where none was obvious.

##### Pure Alpha

In investing, it seemed Bridgewater could take one of two paths: high-risk high-return, or low-risk low-return. The former was so volatile it risked a total wipeout; the latter is unrewarding.

Instead, upon thinking harder, Dalio found his “holy grail” of investing—compiling a portfolio of uncorrelated assets could improve the return-to-risk ratio and reduce the risk of losing money in any given year. He could essentially have high-returns with lower risk.

This led to Bridgewater’s flagship fund, Pure Alpha, which has returned an annual average of 18% across its nearly 30 years and is considered the best performing fund of all time.

##### Bridgewater’s Culture

In the 90s, Dalio’s lieutenants gave him feedback about how his openness makes them feel incompetent and humiliated and engenders toxicity. It seemed they could have one of two things: 1) be radically truthful and bring weaknesses to the surface, 2) have happy and satisfied employees.

He came to understand that people who weren’t as close to Ray didn’t know his principles and misinterpreted his directness.

This led Ray to put his management principles in writing, clarifying why radical transparency was critical to success, and providing a framework for resolving disagreements.

#### Weigh Second- and Third-Order Consequences

Every action has a direct “first-order” consequence, as well as longer-term second- and third-order consequences.

For example, saving money has the first-order consequence of deducting money from your account that you can’t spend today. While this is painful, the second-order effect is better—you have more money saved for retirement. The third-order effect is even better still—with more money saved for retirement, you feel less stress about your career and might have more options for how you spend your time.

Think of the consequences as a series of dominoes, one triggering the other.

Some of the hardest habits to adopt have painful short-term first-order consequences but fantastic second- and third-order consequences. **Don’t let short-term first-order consequences deter you from reaching the real goals.**

As another example, physical fitness requires the painful first-order consequence of exercise, dieting, and self-restraint when eating. The second-order consequence is better health. The third-order consequence is greater happiness, self-confidence, and more. It’s worth enduring the shorter-term pain for the longer-term gain.

Inversely, some things that are bad for you long-term have very tempting first-order consequences. For example, smoking presents an immediate first-order reward, with dire long-term consequences.

From his evolutionary viewpoint, Dalio considers that nature may even be throwing us trick choices to punish people who make short-term decisions on first-order consequences alone.

#### Make Expected Value Calculations

When you have your options on the table, assess them for what gives you the **highest expected value**.

The concept of expected value comes from statistics and involves multiplying the probability of an outcome by its value. For example, say an opportunity has a 20% chance of returning $1,000, or an 80% chance of failing and costing you $100. The expected value is 20% times $1,000 plus 80% times -$100, or $200 - $80, or $120. Here, the expected value is positive, so it’s probably a good bet, even though you have a majority chance of losing money.

Dalio’s point here is to **avoid rejecting an option simply because there’s something wrong with it**. Many people shy away from options that have any possibility of downside, taking very safe options instead, even though the safe options don’t have the highest expected value.

Every option has a probability and reward for being right, and a probability and penalty for being wrong. The important thing is to figure out what those probabilities are, then choose the one that will give you the best return.

Here are a few important conclusions from this style of thinking:

*   It’s OK to take a chance when the chances of success are low but the upside is very high, as long as the downside is low.
*   Increasing the probability of being right is valuable. Raising your probability of being right from 50% to 83% means that a third of your bets will change from losers to winners.
*   Be OK with not making bets. You’ll have a better track record if you only make bets that you’re very confident will work.
*   Avoid people who reject options simply because they find _anything_ wrong with it, rather than carefully weighing the pros and cons and expected value. These people tend to be poor decision-makers.

Part 2-6: How to Make Decisions Effectively

In the final section, Dalio discusses his Work Principles that govern how Bridgewater operates. The Work Principles are really just his Life Principles applied at organizational scale.

Like with personal life, the ultimate goal in work is to find the truth by leveraging the strengths of the group. The trick is to do this with thoughtful disagreement while bypassing the inevitable emotional conflicts that arise.

### Introduction to Work Principles

#### Great Organizations

A great organization has two things: 1) great people and 2) a great culture.

Great people have two things: 1) great character and 2) great capabilities. One without the other is dangerous. People with great capabilities who do not have great character will not be aligned on the mission, and they will work on their own conflicting goals. People with greater character without great capabilities are pleasant to be around but don’t contribute to the organization’s goals. People who have both character and capabilities are rare and valuable.

Great cultures have a consistent way of improving the machine to accomplish its goals. They have a way to surface disagreements between people and to resolve them effectively.

#### The Organization as a Machine

Look down on the organization as a machine, consisting of culture, people, and processes.

The goal is to create a machine that works so well you can sit back and watch beauty happen.

Compare its outputs with its goals; if it is falling short, then something is wrong with the people or the design.

#### Idea Meritocracy

An idea meritocracy is an environment in which the best ideas win, regardless of where or whom they came from. Dalio believes **the idea meritocracy is the best system for making decisions.**

The way to build an effective idea meritocracy is to:

1.  Bring together smart, independent thinkers
2.  Have them thoughtfully disagree with each other
3.  Get past disagreement using agreed-upon systems.

Together, this will yield the best ideas and collective thinking. Idea meritocracy works better than just one person coming up with the ideas and issuing orders. It also works better than a group of smart people who can’t thoughtfully disagree with each other.

An idea meritocracy is built on a few foundational principles:

*   Radical truth
*   Radical transparency
*   Thoughtful disagreement
*   Believability-weighted decision making

We’ll explore each one in the following chapters.

Part 3: Work Principles

**To be great, you can never compromise the uncompromisable.** To Dalio, the uncompromisable is finding out the objective truth and making the best decision.

Many other things are compromisable—people’s emotions, ego, anxiety, and “little deals” that distract from the “big deal” of knowing and acting on the truth. All of these can be sacrificed in the name of making the best decision and finding the objective truth.

Radical truth and transparency are critical to building the best idea meritocracy. If you have access to more truthful information, you can make better decisions. When everyone is able to hear what everyone else is thinking, learning compounds and the organization gets better.

In contrast, hiding the truth from people is like letting your kids grow up while still believing in the Tooth Fairy.

### Radical Truth

**Radical truth means not putting a filter on your thoughts.** You reveal your thoughts and questions relentlessly. You surface issues immediately instead of hiding them.

When the entire organization does this, it creates opportunities to have thoughtful disagreement and see things through each other’s eyes. It surfaces disagreements when they first appear, rather than letting them fester under the surface.

In contrast, at many workplaces, people tend to hide their real thoughts, and they bury problems and disagreements. This aggravates misunderstandings or disagreements, and it leads to larger conflicts and distance between team members.

At Bridgewater, **everyone has not only the privilege but also the _obligation_ to speak up publicly**. For example, an employee sent Ray an email that read, “you deserve a D- for your performance in the meeting...it was obvious that you did not prepare at all.” In how many companies is it encouraged to send the founder/CEO an email like this?

People at Bridgewater are obligated to say what they say to people’s faces, instead of talking behind their backs. Gossip shows a lack of integrity and is considered the worst thing possible at Bridgewater. People who do this are called “slimy weasels.”

#### Short-Term Painful, Long-Term Helpful

As discussed in the decision-making chapter, some good things in life cause short-term pain but long-term gains. This applies to radical truth.

Often the cost to radical truth is open criticism and the discomfort that follows. But this should be seen as a sign of tough love. It’s a sign of caring and respect to tell people what they need to improve.

Dalio expects that when he does something dumb, other people should tell him so immediately and to his face. To do otherwise would be unproductive and unethical.

In essence, radical truth is an organizational reflection of the idea, “Pain + Reflection = Progress.” People who can internalize this on an individual level can operate similarly on the organizational level.

If you’re clear about why you’re being radically truthful, there won’t be any misunderstandings about your intent. People will understand why you’re being tough on them—because your purpose is to arrive at the truth, not to prove that any one person is right or wrong.

Radical truth creates a powerful freedom of thought. When you align what you feel and what you say, life gets simpler. You can focus on the most important things, and you’ll be happier.

#### Mistakes are OK

In many organizations, hiding mistakes is standard, and people feel they’ll be punished for mistakes. This has the counterproductive effect of hiding the organization’s weak points and lowers performance.

In reality, **mistakes are key opportunities for learning**. They inevitably cause pain, but that pain is the signal to reflect and diagnose the mistake. You should create a culture that has this mindset as a core value. Ideally, everyone embodies the Life Principles described in the previous part of this summary.

In the organization, it should be OK to make mistakes, admit them, and learn from them. It should never be OK to hide mistakes or to avoid learning from them.

### Radical Transparency

**Radical transparency lets everyone see everything.** Everyone gets access to the full truthful information, rather than having it filtered through other people first. In turn, people with better information can make better decisions, and the organization draws on the full power of its people.

At Bridgewater, radical transparency means:

*   All meetings and interviews are recorded and made available to the entire team.
*   Baseball cards show each person’s strengths and weaknesses.
*   During meetings, a dot collector tool lets people submit real-time impressions of each other in meetings. For example, while you’re giving a presentation, others might give you ratings of being “a poor presenter” or “great at understanding detail,” and this is made public for everyone to see.

**Radical transparency has a range of important benefits:**

*   It reduces politics, since everything’s out in the open.
*   It reduces bad behavior, since it can be monitored.
    *   At first, lawyers thought recording everything would be a liability in lawsuits and regulatory action. In reality, radical transparency _limited_ bad behavior to begin with, since people knew they were being watched. It even protected people when they were accused of things they didn’t do.
*   It prevents the syndrome of people doing two jobs—their actual job, and the job of managing others’ impressions of them.
*   Justice is more likely to prevail correctly, because decisions aren’t just made behind closed doors by powerful people.
*   Learning is amplified by other people’s experiences. For example, recorded meetings provide training scenarios, where new employees can simulate their responses to real situations.

Dalio suggests that **you should be radically transparent as a default, with very few exceptions**. Often the most difficult information to share is the most important to share, because it builds the trust of people you are sharing it with. Consider the second- and third-order consequences of not sharing something.

Bridgewater has only a few exceptions to radical transparency:

*   When information is private or personal and doesn’t pertain to the community (such as personal health issues).
*   When information puts the long-term interests of Bridgewater or its clients at risk (such as trading details that competitors can use, intellectual property, or audits of departments).
*   When the value of sharing is low but the risk of distraction is high (such as compensation, or information that will be distorted by the media).
*   People who show they cannot handle transparency lose their privilege to transparency and are often removed from Bridgewater.

**When practiced well, radical truth and radical transparency have a flywheel effect that gets stronger.** The more care you give each other, the tougher you can be on each other, the better you will perform, and the more rewards you get.

### Caveats to Radical Truth and Transparency

Radical truth and transparency aren’t easy to execute. Dalio cautions against a few issues:

#### Dishonesty Will Happen

People will continue to lie, and there will be dishonest people no matter what you try to do. Don’t be naive about this. When they’re caught, they’ll say they’ll never do it again, but they most likely will.

Yet Dalio doesn’t see it as an absolute rule, since firing everyone who has ever lied would mean he’d have no one to work with.

Instead, treat each case of dishonesty independently, and decide it based on the severity of the transgression and the prior history. Get rid of habitual liars.

Then deter future bad behavior with “public hangings” where violators are made examples of.

#### Adjustment Time is Needed

Radical truth and transparency are so different from how most places operate that most people need an adjustment period. Bridgewater finds that new employees can take 18 months to adjust fully, and many people never adjust at all and leave.

Radical truth and transparency also need to be managed to avoid excesses. With access to all this information, people can get involved in more things than they should. Likewise, people who can’t weigh information responsibly may draw the wrong conclusions from all the data they see.

### How to Get in Sync and Stay in Sync

Getting in sync means getting alignment on all levels, and resolving misunderstandings and disagreements. While it can cost time and energy in the short-term, getting in sync is a great investment, because it helps people resolve their differences and move closer to the truth.

Radical truth, thoughtful disagreement, and radical open-mindedness are necessary to get in sync.

There are endless numbers of disagreements that can possibly be resolved. **Prioritize getting in sync on the most important issues with the most believable parties.** Make a list of disagreements in priority, then go down the list.

*   Downweigh what Dalio calls “chirping,” which is complaining from people who don’t take the full picture into account or who are close-minded.

#### Be Open-Minded and Assertive

To resolve disagreements, **you need to be open-minded and assertive at the same time**. You must see things through the other’s eyes while communicating clearly how _you_ see things. This is essential to the idea meritocracy.

Most people find it easier to be assertive, since it’s easier to share how you see things than to empathize with the other person. Remind these people that the real winners are those who change their minds, since they learned something.

Other people are not assertive enough, and they’re too willing to accept others’ conclusions. Hiding your viewpoints hampers the idea meritocracy, since the best ideas result when all ideas are laid on the table.

#### Suggestions Are Not Criticisms

Keep in mind that **suggesting things and questioning are not the same as criticizing**. This is the difference between “watch out for the ice” vs “you’re being careless and not looking for the ice.” Your ego may confuse the two.

A person making suggestions may not have concluded a mistake _will_ be made—they’re just double checking.

#### Managing Group Meetings

Here are tips managing meetings to be more effective:

*   Make clear who is leading the meeting and what the goals are.
    *   A meeting aimed to educate should be run differently from a debate between different opinions.
*   Limit the participation to whom you value most for your objectives.
    *   For debating a topic, 3-5 smart people may be better than 20, due to the decreasing marginal benefits of new perspectives, and inefficiency in coordinating a larger group.
    *   For educating, more people should be involved, since this increases leverage.
*   Make clear what level the meeting is operating on: the principle/machine level, the case-at-hand level, or the specific-fact level. Be conscious of how the conversation navigates between levels.
*   If someone inexperienced offers an opinion, weigh the cost of exploring their opinion vs. the gain in assessing their thinking.
*   Avoid topic slip by tracking the conversation on a whiteboard so everyone can see where it’s going.
*   For regular meetings, have standardized meeting agendas.

#### General Tactics for Conversations

Here are tips for navigating conversations, in group meetings or outside of them:

*   Start by assuming you’re not communicating or listening well, rather than blaming the other party.
*   Repeat what you’re hearing to make sure you’re getting it.
    *   When hearing a question, repeat the question to be clear what is being asked and answered.
*   Worry about the substance of what is being said more than the style.
    *   If you’re bothered by someone’s style of communication, compartmentalize it as a separate issue, and focus on what they’re saying.
*   If someone says “I feel like \[X\] is true,” ask them, “Is it true? How do you know?” to ground them in facts.
*   If someone is getting interrupted, use the 2-minute rule. This means the person has two minutes to talk without being interrupted. It gives the person a chance to explain her reasoning completely.
*   Beware of “assertive fast talkers”—they say things faster than can be comprehended to deter objections. This is especially effective against people who are worried about looking dumb.
    *   To neutralize fast talkers, say “I’m sorry for being dumb, but I need to slow you down to understand what you’re saying.”
*   If either party is too emotional to be logical, defer the conversation by hours or days.
*   End the conversation by stating the conclusions.
    *   If there isn’t agreement, say so.
    *   If there is further action, make a to-do list, and assign people tasks with specific deadlines.
*   Get leverage in your communications by sharing. Share emails with meeting conclusions or recordings of meetings.

Part 3-1: Radical Truth and Radical Transparency

Once facts and viewpoints are put out there through radical truth and thoughtful disagreement, how do you reconcile them to make the best decisions?

To maintain order and allow the best decisions to surface, people must agree on procedures to resolve disagreements, and abide by the conclusions of the procedures. At Bridgewater, the procedure they use is **believability-weighted decision making**.

**“Believability-weighted” means to weigh the opinions of people who are more believable more heavily than less believable people.** This is distinctly different from weighing everyone’s votes equally, as in a democracy.

Who are believable people? They are people who **1) have repeatedly succeeded at the thing in question, and 2) can logically explain their conclusions**. It makes sense to value the opinions of successful people more than those with little experience.

#### Bridgewater’s Dot Collector

At Bridgewater, Baseball Cards and the **Dot Collector tool** help people see each other’s track records and believable areas. Recall that the Dot Collector is a tool used during meetings where people can award each other dots (positive or negative) on a few dozen attributes, such as expertise in the topic area, creativity, open-mindedness, and so on.

People who are rated as more believable in an attribute have more weight behind the dots they give for that attribute. Over many meetings and many ratings by other people, a person’s strengths and weaknesses become very visible through the Dot Collector.

#### How to Behave in Believability-Weighted Decision Making

When stating your beliefs, also state the degree of conviction behind them. Do you offer it merely as a suggestion, or do you have diehard conviction behind it? This will make clear how strongly people should weigh your opinion.

When listening to other people, listen to the reasoning moreso than the conclusion. Ask questions like, “What data are you looking at? How do you draw your conclusions from this data?”

Recognize that great ideas can come from inexperienced people, since they are not set in their ways as much as veterans are.

#### When You Are Less Believable

If you are less believable in an area, be humble about your position. If you can’t successfully do something, it’s arrogant to tell others how it should be done, and you have little right to be listened to. Could you lecture Michael Jordan on how to shoot free throws? Dalio cautions, **don’t hold opinions about things you don’t know anything about.**

In these situations, you are the student, and more believable people are the teachers—spend more time asking questions to understand _their_ logic than pressing your own ideas.

In discussions, you should not expect equal treatment of your ideas if you’re not as believable. You shouldn’t expect the teacher to try equally hard to understand you as you try to understand her.

How can you become more believable? Stress-test your ideas with other believable people and test it with real data, and your idea will become more believable. You can also articulate clear logic behind your idea, and you will be more believable than if you just had a hunch.

#### How to Make Decisions

After the discussion has ended, it’s time to put it to a vote. **Collect the votes from everyone, then weigh each person’s vote by how believable they are for this decision.**

Compare the democratic equally-weighted result with the believability-weighted vote. If the two align, then the answer is easy—you have a final decision, and you can move on. **If the two disagree, then you should generally go with the believability-weighted vote.**

At Bridgewater, the Dot Collector tool automates all of this by collecting votes from each person at the meeting. It then shows everyone’s votes, as well as the believability-weighted results.

The vote is just a strong suggestion—the meeting still has a person who’s ultimately responsible for making the final call. In some cases, this final decision-maker can override a believability-weighted vote, but this comes with risk—they can later be proven wrong by the outcome. This overriding also runs against the spirit of the idea meritocracy. If you override the believability-weighted decision, you should be able to define what _specifically_ you disagree with, explain your logic to others, then state that you understand the risks of being wrong.

**At the end of the day, know when it’s time to stop debating and to move on.** Get the big things right, and don’t worry about perfecting the small things. But—if you disagree on whether it’s important to debate something, it probably should be debated.

Finally, if the decision you wanted isn’t what’s decided, you must support the decision. This signals that you believe in the validity of the system more than you care about getting your way. The success of the group is more important than your individual desire.

*   The right to debate is not the right to make decisions. The person responsible for making the final call has the sole responsibility to make decisions.

### How to Get Past Disagreements

Believability-weighted decision making is the system Dalio recommends to resolve disagreements. But some lingering resentment may still arise. Here’s how to deal with it.

See disagreements from top-down as “just another one of those,” and have procedures ready to resolve them.

Don’t leave important conflicts unresolved—escalate the conflict to a higher authority, or put it to a vote.

**Don’t let little disagreements divide you when big agreements should bind you.** This is also known as the “narcissism of small differences.” Dalio cites the example of how Protestants and Catholics should really band together because they follow Christ, but instead they quarrel over the small details.

People must abide by the policies and procedures, just as though it’s a dispute taken to court. **Two people can’t agree to ignore the principles, just like two people can’t agree to break the law.** If people have enough power to undermine a system and care more about themselves than preserving the system, the system will fail.

*   Don’t let people threaten the system. Be suspicious of people who suspend idea meritocracy for the supposed good of the organization. Don’t allow mobs to get emotional and grab control.
*   Don’t let people take it to an extreme, arguing about whatever and with whomever they please—or argue they have the right to threaten the meritocracy based on principles.

Finally, remember that the goal is to get to the truth, not to prove someone is right or wrong. If everyone can earnestly believe this, there should be little ultimate conflict when a decision is made.

Part 3-2: Believability-Weighted Decision Making

Dalio believes **the WHO is more important than the WHAT**. Deciding what is to be worked on is less important than deciding who is responsible for deciding what to work on. Deciding what a job’s responsibilities are is less important than deciding _who_ would be best at serving them.

The people are even more important than the culture, because the people shape the culture.

In several useful tactical chapters, Ray Dalio lays out his principles for people management. The major themes are:

*   People have different values, abilities, and skills. Values and abilities are very hard to change, so don’t hire people lacking either values or abilities, and don’t rehabilitate people who are discovered to lack them.
*   Seek the truth on people’s mistakes and shortcomings. Use good metrics to measure this, and monitor them frequently.
*   Impress to workers that accuracy of feedback and kindness are the same thing. A caring gift you can give someone is the self-awareness to be successful.
*   Make the hard decision to fire people in pursuit of the organization’s goals.

### Cultivate Meaningful Relationships

Treating people like partners or extended family will make relationships more special than quid pro quo employment agreements. People struggle well together on a common mission, and they help each other evolve.

Expect your team to think like owners, and to behave accordingly.

*   This helps people uphold their responsibilities, such as making sure things are taken care of when they’re on vacation, and spending company money like it’s their own.

**Great relationships are built on common values and interests, having similar approaches to pursuing them, being reasonable and considerate with each other, and holding each other to high standards.**

*   Dalio considers Bridgewater “a family business in which family members have to perform excellently or be cut.”
*   It’s important to have shared values and mission. People who aren’t aligned on the mission will work for different, conflicting goals, such as whatever makes more money for themselves at the expense of values.

People who buy into the community provide it with a long-term skeletal strength. The stronger the community is, the more it protects against bad actors.

People in a community should be more considerate to others than what they demand for themselves. For example, if you are offended by how someone behaves, it is inconsiderate to ask them to stop exercising their rights for your sake.

Don’t be naive about how people behave. **Most people will pretend to operate in your interest while operating in their own.** Treasure honorable people who will treat you well even when you’re not looking.

Other tactics to build relationships:

*   Fund ways for people to build relationships with each other. Pay for half of activities people want to do together, and pay for food and drink at hosted dinners.
*   Accept that some people will not buy into the culture. They can still contribute a lot and be considerate.

#### Compensation

Despite all the positives of culture, people need to get paid for their work, so how should you pay them? Dalio gives some advice:

*   Strive to be on the far side of fair. Each party should aim to say “you deserve more” to each other.
*   Make sure people’s incentives align with their responsibilities, so they experience the consequences of the outcomes.
*   People doing above-normal work should be paid accordingly; likewise for people doing below-average work.
*   Being generous does not necessitate total fairness or entitlement. In general, people should be happy with what they get, and not point to what other people get as justification for getting the same thing.
    *   For example, many people commuted from New York City to Bridgewater’s Connecticut headquarters, so Bridgewater funded a shuttle for people who live in New York City. One employee suggested that it’d be fair to compensate drivers for the hundreds of dollars they spend on gas, since bus riders were getting free transit. Dalio felt no obligation to be equal in generosity.

### How to Hire Right

**The penalties for hiring wrong are huge.** Years can pass when entertaining a bad hire. Many dollars can be spent in training and retraining. The graver hidden costs are a loss of morale among competent team members, and a sense of diminishing standards that will progressively cripple the company.

The importance of hiring is even greater when you choose people who operate at the highest levels, who are responsible for designing the machine and goals of the organization.

As with most things, Dalio recommends designing a great hiring machine that can systematically produce great hires.

#### Design the Machine First—_Then_ Find the Person

Focus not just on _what_ should be done—focus on _who_ the right person for the job is.

**Create a clear mental image of the values, abilities, and skills required for each person in the role to do their job well.** Values, abilities, and skills are listed in order of importance.

Values are the fundamental beliefs that drive people’s behaviors. People with similar values get along; people with different values will fight constantly.

What is the difference between abilities and skills?

*   Abilities are fundamental ways of thinking and behaving, such as “fast learner” or “high-level visionary.” These are unlikely to change much and are important to select for.
*   Skills are learned tools and can be acquired in a finite period of time. These are less important, since capable people can learn new skills quickly.

Once you have an idea of the criteria you’re looking for, create a spec sheet with the criteria that you are looking for.

Do NOT design jobs to fit certain people. You may have favorite candidates in your team and be tempted to fit the role for what they’re good at. This is counter-productive, since the best candidate may come from outside.

#### Systematize the Process

Most organizations hire by asking semi-random questions and then choosing based on how much the interviewer liked the person. This is prone to error and does not lead to systematic selection of strong team members.

To build a good interview process, **think through what questions will be asked, and how different answers differentiate candidates of different qualities**.

Save the answers that candidates give. Once the people you hire give you performance data, you can tell how predictive the questions are of certain behaviors.

Humans are subjective evaluators of other people. Design the process to minimize the bias:

*   When the interviewer is tasked with making intuitive judgments about a person, capture the interviewer’s evaluations. This will let you assess their track records of accuracy later.
*   People pick people similar to themselves, so choose interviewers who embody the qualities and abilities you’re hiring for.

Consider using personality assessments to know more about a candidate.

#### Look for Extraordinary People

The difference between average people and outstanding people is big. **If you’re not excited about a candidate, don’t hire them.** Hold out for exceptional people.

Consider the applicant’s track record to see if they have demonstrated themselves to be extraordinary in some way. While brilliant people often make for great hires, **experience and a great track record mean a lot**. Malcolm Gladwell has a rule that it takes 10,000 hours to master something, and Dalio has found specialists who spent decades honing their craft.

*   To show the skills of a rookie, have them debate an experienced veteran to see how they hold up.

Dalio likes people who ask great questions more than people who have great answers.

Don’t hire people just for the first job they’ll do; hire people you want to spend decades with.

#### Warnings About Hiring

*   Talk to believable references who can give you a clear picture of the candidate’s career path. Candidates tend to exaggerate accomplishments.
*   Success in school, like high grades and honors, is a limited gauge of certain attributes: memory and processing speed, determination to succeed, willingness to follow directions. **Success in school does not necessarily correlate with common sense, vision, and creativity.**
*   Beware the “impractical idealist” type—these people don’t execute practical plans that produce results.
*   Don’t use your influence to do someone a personal favor and get them a job. This is bad for the team, since it undermines the process, and it’s bad for your reputation.
*   People don’t change all that much. Assume that what you see is what you get, and don’t hope for some miraculous change.
*   Make sure hires have both great character and great capabilities. Having one without the other is harmful to the organization.
*   Show candidates the bad parts of your company too. Put them in situations showing the most difficult aspects of your principles, so you’ll test their endurance under challenge.

#### Making the Offer

Compensate in ways to cover both stability and opportunity. Pay enough so people aren’t stressed for money, but not enough that they become complacent. They shouldn’t come to you just for job security; they should be motivated to earn more money through good work.

Start with what a person of similar skills gets on the market. Don’t use job titles as the sole comparable.

Then build in incentives based on performance metrics so they’re motivated to outperform.

Pay north of fair. Dalio thinks the best negotiations are those in which both parties argue that the other should take more.

Whenever you’re ready to make an offer, think one last time about what important things can go wrong and how you can raise your probability of being right.

### How to Train, Evaluate, and Sort People

Managing people is a simple series of steps:

1.  Define the goal.
2.  Give the goal to people who can achieve it. Preferably, you don’t need to tell them what to do to achieve it (this is micromanaging).
3.  Hold the responsible people accountable for reaching the goal.
4.  If they fail, train them and give them time.
5.  If they can’t do the job after this, switch them to a different job that matches their strengths, or get rid of them.

The ultimate responsible party is the person who bears the consequences of failure. If you’re the business owner, that is you. For example, it’s your responsibility to pick the right doctor, since you bear the responsibility if she does a bad job, not the doctor’s.

Here are Dalio’s principles on how to train new people, evaluate how people are doing, and how to decide what to do with people based on how they’re doing.

#### Training

Generally, it takes 6-12 months to get to know an employee’s strengths and weaknesses and their preferences for work. It shouldn’t take longer than this to know whether someone is a good fit for their job.

This should be an iterative process. As you learn more about the trainee, she should get new assignments tailored to her strengths and weaknesses and her preferences.

When evaluating the trainee, it’s best to have at least two believable trainers triangulate their view on the trainee.

Resist micromanaging the trainee, or any employee in general. Don’t tell people what they should do—if you feel this is needed, it probably means the person being micromanaged lacks ability. Train and test them, then explore how they make decisions.

#### Delivering Feedback

Feedback is a constant process, done throughout training and beyond. It’s a key part of radical honesty, but feedback can often be painful.

Start from specific data points, look for patterns, then build up to a larger picture.

When giving feedback, **ask people to focus on whether the feedback is true**, rather than the implications of that feedback (such as whether they’ll be demoted). Ask, “does this feedback sound accurate to you?” Use this to learn about them and discover root causes together.

**Reflect what is succeeding and not _in proportion_ to the actual situation.**

*   If things are going poorly, don’t feel obligated to balance compliments and criticisms for the sake of complimenting.
    *   Dalio’s tendency is to avoid celebrating how great they are and instead to focus on where they need to improve, since that’s how Bridgewater got to be great.
    *   Compliments are nice to receive, but they don’t help people stretch and grow.
*   If communicating a weakness or mistake, put it into context of the person’s total evaluation. A glancing comment from a superior could make someone afraid of being fired.
    *   At Bridgewater, Dalio saw a high-performing trainee talk for a long time about non-work topics, and he gave stern feedback to stay on task. Later Dalio found the trainee thought he was going to be fired.

Feedback can hurt. Remind the person receiving feedback that **accuracy and kindness are the same thing.** Feedback is a gift that gives the recipient the power to be successful.

*   A management relationship should feel like skiing together—you do things by trial and error, and you have good back-and-forths. Ideally your reports don’t feel like you’re their enemy, and rather that you’re trying to help them.
*   Remind them about how pain is a signal for reflection and finding the truth, and that the truth is more important for meeting their goals than satisfying their ego.
*   Let them see their failures so clearly they are motivated to change them.

#### Evaluation

Make a clear “contract” on what the expectation of work is. Without this, you can’t hold people accountable for it not being fulfilled.

*   Review goals, tasks, and responsibilities at least once a quarter.
*   Meet more frequently to get in sync—perhaps at a ratio of 1:10 to 1:20 for the time spent with the person over the time the person spends working.
*   If someone performs poorly, make sure it’s not because the expectations weren’t clear to them.

Make your metrics clear-cut and impartial. **Define the most critical metrics, and have discipline in checking them regularly.**

*   Even better, tie the metrics formulaically to predetermined consequences (like bonuses).

Take data points over time to notice patterns in people. Built from the specific data—their metrics, performance, input from others—up to an overall impression.

*   Bridgewater uses the Dot Collector to compile thousands of data points about people over time.

Evaluate employees with the same rigor as you do job candidates. Don’t be easy on people just because they’re not outsiders.

Hold people to the same standards, and provide feedback consistent with the standards.

*   Don’t hold the stronger performer to a higher standard.
*   Don’t spread the blame. The person who is most in the wrong needs to get the strongest feedback. Otherwise, they might believe they didn’t cause the problem.

Assign credit precisely. Specific people are responsible for specific results.

*   Everyone thinks what they’re doing is more important than it really is. People tend to overestimate their own contributions. If you survey people on what their % contribution to the organization is, you’ll end up with well over 100% in total (Bridgewater’s was 300%).

Dalio likes “forced rankings,” in which people rank their co-workers from best to worst. This prevents an assessment of everyone as above average, and it helps identify low performers.

**Don’t be overconfident about your assessments.** Use other people to develop your assessment.

*   Triangulate your impressions of people with other believable people.
*   Get in sync with the person you’re giving feedback to. Do they agree with your feedback?

Judge people based on both their reasoning and their outcomes. Often, the outcomes are out of their control, and **if the person had sound reasoning, they should not be punished for a poor outcome**.

*   To use a golf analogy, “Pay more attention to the swing than the shot.”

Periodic performance reviews should contain few surprises—feedback should have been delivered continuously so that people know where they stand.

Check behavior, and deter bad behavior. More people than you think will cheat if given the opportunity.

*   Choose people to audit or investigate. Explain that you’re doing this and why to the people under audit, so there are no surprises.
    *   They shouldn’t take this personally as a lack of trust, just as bank tellers shouldn’t complain when banks count the money in drawers.
*   Auditors’ procedures should not be known to those being audited.
*   Find ways to audit the auditors to avoid simple rubber stamping.
*   If you find a rule violation, use “public hangings” to deter future bad behavior.

#### Decision Points

Based on people’s performance, you will need to figure out what to do with them.

##### For People Who Aren’t Working

Some people are just not suited for the jobs they were hired for. Keeping them in those jobs is toxic to the entire system. It compromises the meritocracy and lowers morale. It also holds back the person’s personal evolution, because it prevents them from discovering another way they can contribute, in your organization or another.

**Diagnose the failure to get at the root cause.** It can be due to design problems in the machine (such as giving someone too many responsibilities), lack of ability, or lack of training.

*   Don’t confuse lack of skills for lack of abilities. Remember the abilities are fundamental ways of thinking and behaving, while skills are learned tools. If someone lacks ability, they’re unlikely to gain that ability, and you will waste time trying to train them.
*   Don’t count on people to save themselves or design their own best solution.

**If the problem is a lack of values or abilities, don’t rehabilitate them.** Rehabilitation involves changing people’s values or abilities. Again, these don’t change much. It’s best to assume their values and abilities are what they are, unless there is good evidence to the contrary.

Figure out whether the person is a better fit for another job in the organization. But be careful—understand why they failed, and why this won’t happen again in the new job.

Add guard-rails to a person when needed. Guardrails are structures that help people stay on course; a good guardrail can be a team member whose strengths compensate for the person’s weaknesses. But caution against using guardrails to help failing people reach the bar; it may be better to focus on making good people better.

If the person is failing in a role they were promoted to, beware of letting people step back into their previous role.

*   This prevents people who can advance from taking the role, and people who can advance are better than those who can’t.
*   Emotionally, the person may resent being demoted to a job they probably can’t advance beyond. It may be better for them to start anew elsewhere.

It’s hard to fire people you like and care about, but it’s necessary for the good of the organization.

##### For Great People

Great people with great values and capabilities are rare. **Think about how to keep great people.** Encourage them to speak up about how things are going.

Part 3-3: People Management

Just as in personal life, where you should view yourself top-down as a machine, for your work life, **you should view your organization top-down as a machine** as well.

Like a foreman on a construction site, you should understand your tools and the components of the machine:

*   Understand how people’s values, abilities, and skills differ, and how they should be matched with goals.
*   Understand the processes and problems around you to make well-informed decisions.

Create great decision-making machines by thinking through the criteria you use to make decisions, before and while you make them.

**A great manager is essentially an organizational engineer in charge of building the machine.**

*   They work hard to maintain and improve their machines.
*   They study how well the machine is doing with metrics. They compare the current outcomes with the ideal outcomes, and find ways to close the gap.
*   They worry about what can go wrong with the machine. They constantly survey the landscape to find suspicious signs of problems.
*   They study what goes wrong in the machine—either it’s a problem with the machine’s design or with the people.
*   They can anticipate the results from different inputs of people. They also expect that people will be imperfect, so they design a machine that produces good results even with mistakes.
*   They make decisions with the primary goal of improving the machine, not to spare people’s feelings.

A master manager basically doesn’t have to do anything. They can sit back and watch the magic happen. Having to micromanage is a bad sign of improper machine design or the wrong people in the roles.

*   But beware of being so distant from the details that you’re essentially not managing at all.

Every problem should be viewed as an opportunity to train and testing your machine.

*   Discuss a problem at two levels: the machine level (why that outcome was produced) and the situation-at-hand level (what to do about it). Doing just the second is micromanaging instead of designing the machine.
*   If you merely replace a broken part, it’ll break again. Keep looking at higher levels to see if there’s a need to redesign the machine.

### Organization Structure

What’s the best structure for an organization, in terms of departments and team structure? Dalio gives these pointers:

**Departmental Construction**

*   Imagine the ideal organization, and only then choose the right people for it. Don’t take the people you have and then fit an organization to them.
*   Build the organization’s departments around goals, rather than tasks.
    *   Marketing and Client Services should be different departments, even though their tasks overlap. If they merged, their goals would conflict (one is to make sales and another is to take care of existing clients).
*   Make departments self-sufficient so they don’t have to requisition resources through bureaucracy.
*   Minimize the number of layers in the pyramid.
*   Add governance and checks and balances.
    *   Governance is oversight that removes people and processes if they are failing.
        *   Even benevolent leaders tend to get more like dictators over time, since they have limited time to make difficult choices. They lose patience with arguments and idea meritocracy, and they issue commands instead.
    *   The company should have a board that determines if the people running the company are capable. The board can select CEOs but does not micromanage the firm.
        *   The board’s reporting lines must be independent of the CEO’s reporting lines, to avoid conflict of interest.
        *   The board must members have the courage to hold people accountable.
    *   Beware of fiefdoms set up by managers, where personal loyalty to the manager can conflict with loyalty to the organization.
*   Dalio believes a single CEO is not as good as a great group of leaders.
    *   Thus Bridgewater has co-CEOs and co-CIOs.

**Team Building**

*   Build from the top down by hiring managers first, who can help build the machine.
    *   Managers should also be good at what they’re managing, so they can intervene in case their reports aren’t doing well.
    *   Managers should have high standards so they can recognize problems.
*   Different people are good at different parts of the 5-Step Process. Build a team of people who complement each other.
    *   Some people are visionaries who set the big goals, some are taste testers who perceive the problems, some are detectives who investigate problems, some are designers who create the plan, some are taskmasters who make sure the plan gets implemented.
    *   Some can do multiple roles well, but no one can do them all well.
*   Make each person’s responsibilities clear. People should not jump to responsibilities they don’t own. There shouldn’t be confusion about who’s doing what.
*   Have straight single reporting lines that don’t cross.
    *   Reporting to two people, especially when across different departments, causes confusion, except when reporting to co-heads of the same department.
    *   Forbid grabbing people from other departments unless first approved by the manager.
*   Limit the ratio of manager to direct reports from 1:5 to 1:10.
*   Allow escalation when people can’t handle their responsibilities. Don’t treat this as a failure, but rather a responsibility. (Shortform note: This is related to the idea of admitting to your mistakes rather than hiding them.)
*   Prevent key man risk by training the next generation of leaders.
    *   Build a perpetual motion machine that can work well without you. Conversely, no one can be so important that they are irreplaceable. You should always be trying to hire someone who is better than you at your job.
    *   Every key person should have at least one person who can replace her, just as you have backup parts for machines.
    *   Expose the next generation of leaders to the thinking and decision making of current leaders. Have the successors do aspects of their managers’ jobs for a while to get vetted.
    *   Beware of people who don’t cultivate their successors, since they want to hold onto power and want their subordinates to stay dependent.

### The 5-Step Process, Applied to Organizations

Just like individuals, organizations employ the 5-Step Process to evolve and continuously improve. Since an organization deals with far more people, it can be even more complicated to step through the entire 5 steps.

You’ve seen many of the ideas here in previous chapters; as you’ll see, they fit neatly into the 5-Step Process.

#### Set Clear Goals

**Make a clear “contract” on what the expectation of good work is.** This means a combination of goals, tasks, and responsibilities. Without this, you can’t hold people accountable for it not being fulfilled.

Be clear on how your lower-level goals achieve your higher-level goals and align with your values.

**Review goals, tasks, and responsibilities at least once a quarter.**

Choose great metrics. **Imagine the most important questions you need answered to know how things are going.** Metrics are indications of this. You should almost be able to manage via metrics alone.

*   Any single metric can mislead. Use multiple metrics, and get enough evidence to see patterns. Look into the underlying data that produce the metrics to make sure they’re accurate.

When you set rules, explain the principles behind them. This way, people don’t just pay lip service to the rules—their code of ethics will compel them to abide by the rules.

#### Identify Problems and Don’t Tolerate Them

**It must be OK to make mistakes, but unacceptable not to identify them or learn from them.**

*   People need to internalize the Life Principles around embracing reality. People need to embrace their pain as a growth opportunity, and reflect on what they have to improve.
*   _Celebrate_ finding mistakes since they’re opportunities to improve the machine..
*   Don’t fire someone for making an honest mistake—this incentivizes hiding mistakes.
*   Do fire someone for hiding a mistake.
*   People must escalate responsibilities they cannot handle.

**Have as many people looking for problems as possible.**

*   Specifically assign people the job of finding problems. These people should report problems to people other than their direct manager, so they can report freely without fear of being punished.
*   Laws are weak unless you have auditors to enforce them.
*   Welcome other people to probe you for problems.

**Probe deep and hard for problems.**

*   Managers should “taste the soup” like chefs do before dishes go out. They should inspect the outcomes themselves, or have someone else in the machine responsible.
*   Have regular standing meetings to avoid interactions slipping through the cracks. Standardize the agendas with the same questions.
*   Dalio likes daily updates, asking his direct reports to write a 10-15 minute update on what they did that day, any issues they encountered, and reflections.
*   You should personally probe to the level that is two levels levels below you. This is the only way you’ll tell how well the person reporting to you functions as a manager.
    *   Have them feel free to escalate problems to you, instead of requiring them to stop at their direct manager.
*   Make the probing transparent to increase the probability of being right (to let others evaluate) and reinforce faith in due process.
*   Pull all suspicious threads. Small problems can be symptomatic of serious underlying problems.
    *   Imagine your small problems are pieces of trash you’re stepping over to get across the room. They may not be critical issues, but cleaning up reinforces a culture of excellence.

**Be very specific when describing problems.**

*   Don’t generalize. Don’t use “we” and “they.” Name specific people and specific instances. Someone made a bad decision.

**Use the 80/20 rule to find the 20% of causes that lead to 80% of the problems.**

**No problem is too difficult to fix.** Some people avoid problems because they seem too difficult. This will only worsen the situation and lead to more work later.

*   In this step, don’t worry about fixing the problems. Just identify them.

**Beware of these barriers to finding issues:**

*   Boiling frog syndrome: with exposure, people get used to problems that would shock them if they saw them with fresh eyes.
*   Groupthink: don’t assume that just because other people aren’t screaming about a problem means that there’s not a problem. Other people are probably thinking the same thing you are, but no one wants to speak up.

Keep an error log to track mistakes and solutions. Then observe patterns of mistakes to see if they are signals of actual weaknesses.

#### Diagnose Problems to Find Root Causes

**When solving problems, a common mistake is to deal with problems as one-time events, rather than diagnosing problems with the machine.** If you don’t fix the root cause, the problem will keep occurring again and again.

Get to the level of what it is about the _people_ involved that led to bad outcomes. **Root causes are described in adjectives, not verbs.** Someone could be “careless,” “not well trained,” or “has low bandwidth.” In contrast, “he forgot to write a reminder” is not a root cause.

**Here’s a checklist of questions to ask to diagnose the problem:**

*   Was the outcome positive or negative?
*   Who was the responsible party in charge of the outcome?
*   Did the responsible party lack ability or skill, and/or is the design of the machine bad?
*   How should the machine have worked?
    *   Stay at the level of the machine (who should be doing what), rather than getting bogged down in procedural details.
    *   Go back before going forward. Reflect on how the machine was working up until now. Tell the story of how we got here.
*   If the machine didn’t work, what broke? This is the proximate cause.
*   Why didn’t things work as planned?
    *   Ask Five Why’s to get at deeper causes.
    *   Pinpoint a specific key attribute (for example, Thomas does not execute well, or Thomas does not perceive problems quickly.)
    *   If this attribute is fixed next time, will the bad outcome still occur?
        *   In other words, if we fixed this part, would that prevent the problem?
    *   If the problem is a faulty design with the machine, ask who was responsible and whether they’re capable of designing the machine well.
*   Does the root cause a have pattern? Does it show repeatedly?
    *   This is the difference between “Thomas was careless” to “Thomas is often careless.”
    *   If it is a pattern, is this due to bad training or lack of ability?
*   How should the people/machines evolve as a result?
    *   Who should do what differently?
    *   Do responsibilities need to be clarified?
    *   Do machine designs need to be reworked?
    *   Do people’s fit need to be reevaluated?
    *   Were principles violated? Are new principles needed?

Remember that this type of questioning will upset people, and they may protect themselves in a number of ways, like fixating on details instead of lack of ability.

**Remember that diagnoses should lead to improvements and outcomes.** Otherwise it’s just a waste of time.

**Stay calm and rational.** Don’t overreact to a mistake or problem.

*   Avoid Monday morning quarterbacking—don’t evaluate a decision with limited information.
*   Understand the context the person was in. Was this decision a quality person would have made? Did they do the right things, but the outcome was out of their control?

Here are common root causes of problems with managers:

*   They are too distant from their reports.
*   They have problems detecting bad quality.
*   They have gotten accustomed to how bad things are (the boiling frog syndrome).
*   They can’t admit they’re unable to solve their own problems, and they don’t escalate.
*   They fear being punished for admitting failure.
*   They fail to delegate their responsibility. They focus more on doing the tasks than on operating the machine.

> **Example of Root Cause Analysis**
> 
> Problem: The team deals with emergencies constantly and has to work overtime.
> 
> Why? Because we don’t have enough bandwidth to fix the issues that cause the emergencies.
> 
> Why? Because the manager did not anticipate the problems and request more headcount to fix it.
> 
> Why? Because the manager is bad at planning for bad cases. (Root cause)

#### Design Improvements to Your Machine

**Take the time to come up with a good game plan.** The time it takes to come up with a plan is far less than the time that people will spend executing the plan.

Visualize the plan working. Picture, like a movie script, who will do what when, and the result.

*   Put yourself in the workflow to understand what you’re dealing with.

**Visualize alternative machines and outcomes.** Don’t settle on the first obvious solution.

*   If something is hard or frustrating, triangulate with others.

Consider second- and third-order consequences of the change to the machine.

Consider that the problem might be happening at other departments, and they may need attention to.

Make changes to the Organization Structure if needed.

Continue articulating the principles behind your decisions in the situation, and check them with other people to improve them. These principles will build habits for solving similar situations in the future.

#### Do the Tasks Required to Completion

Execute the plan and track its progress. Report regularly on the planned and actual progress, and forecast the progress to come. Hold people accountable for their responsibilities.

Remember that fixing the problem is iterative. It will be imperfect for some time as it moves toward the good state.

Most of success comes from doing the mundane stuff, like finding problems and fixing them.

To push through failure, visualize the success and crave the feeling of achievement. Also visualize the tragedy of not pushing through.

Expect things to take 1.5x as long and cost 1.5x as much as you expect.

Use checklists to capture what must be done and to confirm that they are done.

People intellectually know what’s good for them to do, but it won’t happen without good habits. Develop good habits through tools and protocols. Automate decision making if possible.

When you reach your goals and solve problems, celebrate!

Part 3-4: Your Organization Machine | 5 Step Process

Here are a few miscellaneous principles about work that don’t fit clearly into the previous chapters. We’ll also recap the tools that Bridgewater uses.

### Miscellaneous Work Principles

**Don’t let yourself get extorted.** Ignore threats about harmful actions taken, such as quitting, bringing a lawsuit, or leaking an embarrassing story to press. Once you give in, it changes the rules of the game and opens you up to more of the same bad behavior.

Great leadership is a combination of seeking the best answers, being challenged often, and appealing to reason.

*   It’s not about manipulating emotions. This can cause people to refuse you after they reflect clearly.
*   Many leaders see disagreement as disloyalty and would rather issue people just follow orders. But great leaders prefer to have good challengers to stress-test their ideas. Being the only person thinking is not the optimal way to succeed.
*   It’s not illogical to believe you know better than the average person, as long as you stay open-minded.
    *   If you actually don’t have better insights than other people , you shouldn’t be a leader.
*   Don’t worry about whether your people like you. Just worry about finding the truth and making the best decisions you can.

**For critical tasks, use “double-do” rather than “double-check.”** Have two people do the same task to get two independent answers.

*   Remember that a double-check can only be done by someone who can do the work herself.

Consultants are helpful for one-time specialized tasks, but beware of outsourcing work your employees should be doing.

*   Consultants can ultimately cost more and cause greater security risks than employees.

### Bridgewater’s Tools

We’ve covered a number of Bridgewater’s tools already. Here’s a recap of the main ones and introduction of a few new ones.

#### Principles and Coach

For years before publishing this book, Dalio had his Life and Work principles available throughout his company and publicly.

Since there are hundreds of principles, he created Coach, a library of common situations and how to deal with them. People give feedback on the advice that Coach gives.

#### Dot Collector

Dot Collector is a tool used during meetings where people can award each other dots (positive or negative) on a few dozen attributes, such as expertise in the topic area, creativity, open-mindedness, and so on. All of the dots are shown publicly and in real-time, so people can see everyone else’s thoughts throughout the meeting. People often use this feedback to correct how they’re behaving in the same meeting.

The Dot Collector tool also empowers believability-weighted decision making by collecting votes from each person at the meeting. It then shows everyone’s votes, as well as the believability-weighted results. People who disagree with the outcome are alerted and shown steps to resolve the disagreement.

People who are rated as more believable in an attribute have more weight behind the dots they give for that attribute. Over many meetings and many ratings by other people, a person’s strengths and weaknesses become very visible through the Dot Collector.

#### Baseball Cards

Baseball Cards are summaries of people’s strengths and weaknesses and the underlying evidence behind them. The data comes from the Dot Collector as well as performance reviews, personality assessments, and their track record.

Baseball Cards help people assess how believable others are. They also help people construct complementary teams of different abilities.

#### Combinator

The Combinator takes data from Baseball Cards and compares people to each other. It’s used to find people for a particular job. For example, you can type in names of people who fit the role well, and the Combinator will find other similar people.

#### Issue Log

The Issue Log is a place to record mistakes. Anything that goes wrong has to be added to the issue log, with the severity of the issue and who was responsible.

The Issue Log had a cultural effect of making mistakes OK to report.

#### Pain Button

The Pain Button is a tool to help people reflect on the pain they’re feeling. It asks people to record the emotions they’re feeling, then guides them through reflection questions. It prompts people to create plans for how to deal with the situation and prevent the pain in the future. The tool is meant to build a habit of triggering reflection after feeling pain.

The Pain Button also provides analytics, such as the frequency of pain and causes.

#### Dispute Resolver

The Dispute Resolver asks questions to help people resolve their disagreements. It encourages people to express their viewpoints and get in sync. It also presents believable people to escalate the disagreement to, if needed.

#### Daily Update Tool

Dalio has asked his reports to take 10-15 minutes each day to update on what they did, what issues they ran into, and reflections. Dalio uses this to identify problems, see how people are working together, and track morale.

The Daily Update Tool converts the updates into data, letting Dalio see metrics over time and stay in sync more easily.

(Shortform note: It’s unclear if everyone at Bridgewater, other than Dalio’s direct reports is required to use the daily update tool.)

#### Contract Tool

The Contract Tool makes clear what commitments people have with one another. It prevents the problem of meetings ending with un clear assignment of duties, resulting in nothing happening.

#### Process Flow Diagram

The Process Flow Diagram helps people visualize the organization as a machine, showing an organizational chart with roles and responsibilities. It also connects to individual people’s detailed profiles (such as their Baseball Card).

Part 3-5: Misc. Work Points, Bridgewater Tools

Here are a collection of interesting ideas from _Principles_ that don’t fit clearly into any particular chapter. We’ve gathered them in our appendix here.

### Misc Principles

*   It’s important not to get knocked out of the game permanently. So don’t fail too big, and minimize your losses.
    *   Dalio has seen a few people bet so big they ruined themselves—Bunker Hunt who tried to corner the world silver market; Alan Bond who bet that the US dollar wouldn’t rise against Australian dollars and didn’t hedge. Both made fortunes but quickly lost it all.
*   Diversify your success by compiling uncorrelated bets.
    *   Having a few good uncorrelated return streams is better than just having one.
    *   Having uncorrelated bets increases return-to-risk ratio and protects you from unacceptable downside.
*   Traders and entrepreneurs need to correctly bet against the consensus. This also means being wrong more often than usual.
*   The principles build a virtuous cycle: Make audacious goals → fail → learn principles → improve chances of success → meet goals → make audacious goals
*   People expect the future to be merely a slightly modified version of the present, but it is usually very different.
*   Remarks on typical people’s market trading behavior:
    *   Most people are more emotional than logical, thus overreacting to short-term results based on how they feel (like selling low and buying high).
    *   Herd behavior: When everyone thinks the same thing (that something is a sure bet) it’s already reflected on the price, and betting on it is probably going to be a mistake.
    *   When people are very pessimistic, they sell out, and prices get very cheap
*   Meditation creates an equanimity that allows clearer and more creative thinking.
*   When what you expect isn’t matching up with what’s happening, it’s unclear if you have a great opportunity or a huge mistake.

### Warning Signs to Watch For

Here is a collection of warning signs mentioned by Dalio:

*   Use sympathetic responses (tightening of chest, higher blood pressure, faster heart rate) as a trigger to understand that your emotional you is taking over
*   People who issue low-confidence statements and insist they’re implicit questions, but are actually passive-aggressive and closed-minded.
    *   Example: “I could be wrong, but here’s my opinion”
*   “I feel like X is true” or “I think that”—a sign that the person may not be thinking in terms of facts. Ask them what facts they are using to build their logic.
*   When someone objects to ideas by only pointing out minor exceptions and edge cases, rather than weighing all the pros and cons and focusing on whether something is by and large true. This signals people who can’t weigh expected values and probabilities, and instead fixate on anything that’s wrong with a plan. They tend to be poor decision makers.
*   Ask “how is goal X going?” If they reply by listing tasks instead of offering a synthesis of how it’s going, then they tend to confuse goals and tasks, and they can’t be trusted with responsibilities.
*   Assertive fast talkers—they assertively say things faster than they can be comprehended to push back objections. This is especially effective against people worried about looking dumb.
    *   To counter this, slow them down, and apologize for being dumb if you have to.
*   Someone who says “we” to depersonalize a mistake is not taking responsibility for it.
*   Someone who says “we should do X” is proposing a fuzzy solution that won’t get done. Assign specific people and deadlines to solve it.