Book Summaries

Ray Dalio founded Bridgewater in a two-bedroom New York City apartment and oversaw its growth from a staff of two to Fortune’s fifth most important private company in the United States. He credits his success to the development of sound and ethical principles, or “fundamental truths that serve as the foundation for behavior that gets you what you want out of life” (p. ix). He boils these principles down to a five-step process: audacious goal setting, failure, learning, improving, and setting more audacious goals. He positions failure, both in the introduction and throughout the book, as central to learning as an independent thinker, “who correctly bets against the consensus, which means being painfully wrong a fair amount” (p. xiv).

Three principles, which Dalio credits for his personal and business successes, lie at the heart of the axioms offered throughout “Principles:” These principles are: make believability-weighted decisions, operate by clearly laid out principles, and systemize your decision making. Believability-weighting involves considering not only the advice received but also who gave the advice, while operating on principles and systemizing decision making necessitates a degree of what Dalio calls radical transparency – “it just means much more transparency than is typical” (p. 331).

The book is divided into three sections: “Where I’m Coming From,” Dalio’s personal story; “Life Principles,” the personal ethos developed from his life story; and “Work Principles,” insights into how we might apply his personal ethos to business decision-making.

Where I’m Coming From

• Dalio lived a middle-class childhood on Long Island and took up investing after hearing the golfers he caddied for talking about the stock market. He began ordering free annual reports for companies through Fortune, and thus began an investment library – probably the earliest foundation of his principles (pp. 1-9).
• Watching Nixon miscommunicate the state of the U.S. Dollar, Dalio formulated the first of his many axioms: “make sense of what happened to other people in other times and other places because if you don’t, you won’t know if these things can happen to you and, if they do, you won’t know how to deal with them” (p. 15). From Nixon’s mistakes, Dalio came to two conclusions, both pertaining to transparency:
  • It’s best to assume that one is missing something because uncertainty exists in all situations;
  • Good discipline requires reflecting every day. (This conclusion made Dalio decide to begin publishing his famous Daily Observations.)
• The stock market volatility of the period 1979-82 taught Dalio that “timing is everything” (p. 29), especially as he watched very wealthy friends go bankrupt. He noted that the political climate shifted to the right as the term “liberal” shifted in meaning from forward looking to expecting pay without work. Bridgewater, his fund, crashed during this period, forcing Dalio to reassess his own natural aggressiveness. He rebuilt Bridgewater as an idea meritocracy centered on two principles:
  • “Successful people change in ways that allow them to continue to take advantages of their strengths while compensating for their weaknesses” (p. 37).
  • “There is almost always a good path that you just haven’t discovered yet, so look for it until you find it rather than settle for the choice that is then apparent to you” (p. 38).
• Throughout the 80s and early 90s, international experiences helped Dalio see the importance of viewing the world through the eyes of others. Creating genuine, meaningful relationships became the center of his project, and new disagreements helped him realize that these meaningful relationships develop from bad times coupled with good reflections. The new, reformed Bridgewater operated on the principle of using intuition to create new mental maps, then consulting historical data to re-inform these mental maps (pp. 40-65).
• Bidgewater’s outstanding performance and growth during the period from 1995-2010, including during the 2008 economic crisis, gave Dalio time to refine his principles. Dalio recognized that “it wasn’t enough to codify and teach our philosophy; we had to live it” (p. 73). He discerned that many of his professional and personal contacts had difficulty converting good ideas to actions because emotions often form a barrier to this actualization. He approached many of these contacts, which included global leaders, as a doctor would approach a patient – always hoping to make the most positive impact. As maintaining these relationships became an important piece of Bridgewater’s success, Dalio formed another crucial axiom: “The greatest success you can have as the person in charge is to orchestrate others to do things well without you” (p. 79).
• After Bridgewater’s assent, Dalio confronted the reality that success breeds the desire for further success. He became interested in articulating his own management style, which revolves far more around predicting human behavior than simply selecting the most qualified people for the job. He stresses the importance of creating decision trees for prognostication of how people will act, but more importantly, for looking at which obstacles may impede action. To Dalio, managers who can orchestrate their subordinates effectively heroes and emphasizes the fact that the hero does not act alone, and often becomes a helper in another’s story after completing his/her own journey (pp. 91-116).
• Dalio now wants to transition his leadership of Bridgewater effectively and struggles with establishing a system of governing that remains both flexible in its ambitions yet steadfast in its principles. The next two chapters of the book are dedicated to how “looking back from a higher level” might help him in his transition but will also help us, as readers, evolve (pp. 121-124).

Life Principles

“Life Principles” encourages the reader to take nothing in life at face value, to always delve deeper into a series of cause-effect relationships that bring about a particular circumstance. It is divided into five sections: “Embrace Reality and Deal with It,” “Use the 5-Step Process to Get What You Want Out of Life,” “Be Radically Open Minded,” “Understand That People Are Wired Very Differently,” and “Learn How to Make Decisions Effectively.”

• Embrace Reality and Deal with It. A hyper-realistic relationship with reality exposes us to new criticisms, new rewards, and most importantly, an effective workflow. These new exposures correspond with the exposures of an idea meritocracy, which makes sense given Dalio’s belief that “nature optimizes for the whole, not for the individual, but most people judge good and bad based only on how it affects them” (p. 141), meaning that most people have not developed a hyper-realistic relationship with reality, but Bridgewater’s management style can foster this relationship. Dalio succinctly describes this style as, “fail, learn, and improve” (p. 147) but elaborates that learning in accordance with evolution involves three steps:
  • “Memory-based learning – storing the information that comes in through one’s conscious mind so that we can recall it later.
  • Subconscious learning – the knowledge we take away from our experiences that never enters our conscious minds, though it affects our decision making.
  • Learning – occurs without thinking at all, such as the changes in DNA that encode a species’ adaptation” (p. 148).
• As Dalio’s successes with Bridgewater bred the desire for further success, he makes it clear that deep learning inspires only deeper and deeper learning. Failure, however, can breed further failures if one is not alert to the fact that pain is nature’s way of guiding our evolution; Dalio comes to the conclusion that “Pain + Reflection = Progress.” We can internalize this equation by constructing a mental framework that prizes secondary and tertiary outcomes over primary reactions, and by taking responsibility for our decisions. Dalio provides four options for dealing with intrinsic weaknesses: deny them, convert them to strengths, find ways around them, or change goals. We are left with five axioms:
  • Don’t confuse what you wish were true with what is really true.
  • Don’t worry about looking good – worry instead about achieving your goals.
  • Don’t overweight first-order consequences relative to second- and third-order ones.
  • Don’t let pain stand in the way of progress.
  • Don’t blame bad outcomes on anyone but yourself (p. 162).
• Use the 5-Step Process to Get What You Want Out of Life. Dalio revisits the five-step process from the book’s introduction and situates learning and improving as a function of triangulating with people who know the things that we know we do not know. Realizing what one does not know means a willingness to objectively identify the cause-effect relationships at the root of our own actions and a willingness to delegate the smaller tasks that add up to the big picture. “First and foremost,” writes Dalio, “have humility so you can get what you need from others” (p. 179).
• Be Radically Open-Minded. What is true must trump our desire to be right because “differences in thinking can be symbiotic and complementary instead of disruptive” (p. 187). As Dalio learned through his international experiences in the 80s and 90s, radical open-mindedness requires us to see the world through the eyes of others in order to fully empathize and understand. Without this empathy, communication becomes governed by exclusively lower-order concerns and becomes an obstacle as arguments cloud the open exploration of what is true. Open minded people:
  • “Are more curious about why there is disagreement,
  • Assess their relative believability to determine whether their primary role should be as a student, a teacher, or a peer,
  • Always feel compelled to see things through others’ eyes” (p. 197).
• Understand That People Are Wired Very Differently. At the outset of the Bridgewater project, Dalio hired the people who looked smartest on paper and found that their output did not match their résumés; “at the time, we chalked this up to ‘communication problems,’ but the differences were much deeper than that – and they were painful for all of us, particularly when we were trying to achieve big things together” (p. 207). In fact, Dalio found, different modes of thinking produced poor communication, and he confronts in this section the fact that modes of thinking cannot be changed, but we can change our habits, which he defines as “essentially inertia, the strong tendency to keep on doing what you have been doing” (p. 221). Dalio looks at introverts versus extroverts as the quintessential example of different modes of thought and concludes, “Whether it’s in your private life or your work life, it is best for you to work with others in such a way that each person is matched up with other complementary people to create the best mix of attributes for their task” (pp. 231-232).
• Learn How to Make Decisions Effectively. Threats to making effective decisions abound, yet “failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases” (p. 236). Effective decision-making results when we learn to navigate these levels and synthesize. Deciding well can be objectively tracked by regarding each decision made as a bet that pays when we are right and loses when we are wrong; we should always place these bets on odds that pay out excellently rather than simply acceptably. Three steps can help us assess these odds:
  • “Get rid of irrelevant details so that the essential things and the relationships between them stand out.
  • Use principles as a way of both simplifying and improving your decision making.
  • Believability weight your decision making” (pp. 255-256).

Work Principles

This chapter is about finding alignment between life principles and the goals of an institution. It begins with the concept that, “For any group or organization to function well, its work principles must be aligned with its members’ life principles (p. 200)”. Achieving this alignment is also a five step process that includes having clear goals, identifying the problems preventing the goal from being achieved, diagnosing what parts of the machine are not working well, designing changes, and doing what is needed (p. 300). Dalio offers two axioms for implementing this strategy:

• “A believability-weighted idea meritocracy is the best system for making effective decisions,” and “Idea Meritocracy = Radical Truth + Radical Transparency + Believability-Weighted Decision Making” (pp. 307 & 309).
• “Make your passion and your work one and the same, and do it with people you want to be with” (p. 317)

Dalio divides this chapter into three broad sections with several subsections each: “To Get the Culture Right…,” “To Get the People Right…,” and “To Build and Evolve Your Machine…”

• To Get the Culture Right. Getting the right culture in an institution begins with radical truth and radical transparency, which again means “more than normally expected” for Dalio. He stresses again the importance of making mistakes in order to learn and gives six recommendations for effective culture building:
  • Trust in Radical Truth and Radical Transparency. Radical transparency helps constituent parts of the whole understand their roles in the overall process. Dalio cites Bridgewater’s decision to form an external company out of one of his backend development departments. Being upfront and honest throughout the planning process quelled anxieties on the department throughout the process (pp. 325-326). Three notions drove this decision: transparency helped the department understand its role moving forward; it was fairer to tell the truth rather than worry about how it made Bridgewater appear; and his employees were more comfortable living outside the fog of uncertainty. Most importantly, his transparency in this situation helped the development of close relationships around him, as people trusted him.
  • Cultivate Meaningful Work and Meaningful Relationships. When interactions within an institution are framed as for the benefit of the whole, meaningful relationships will form out of a commitment to the common good.
  • Cultivate a Culture in Which it is Okay to Make Mistakes and Unacceptable not to Learn from Them. Dealing with mistakes or weaknesses in open and honest ways allows you to continue pursuing greater goals while learning from past experiences that caused pain. “Pain + Reflection = Progress” (p. 354), Dalio concludes.
  • Get and Stay in Sync. As personal and institutional goals must align, so must the goals of the individuals within the institution. Dalio believes that open-minded, goal-oriented discussion (with clear protocols for resolving conflict) is the key to getting “in sync” within an institution. Both parties ought to enter these discussions assuming they are wrong and understanding there is always another side to their own story. The drive for action and decision lies at the heart of conversing in this manner, as “the main purpose of discussion is to get in sync, which leads to decisions and/or actions” (p. 367).
  • Believability Weight Your Decision Making. This means looking at both your own track record and expertise on a topic and assessing that of others before making institutional decisions.
  • Recognize How to Get Beyond Disagreements. Abide by the governing body of the idea meritocracy and “declare ‘martial law’ only in rare or extreme circumstances” (p. 391).

• To Get the People Right. Dalio stresses the high costs of lackluster production combined with the necessity to retrain someone new when an employee needs to be removed. In the hiring process, search committees should look for candidates with no gap between the qualities needed and the prospective employee’s principles. Getting the right people involves three steps:
  • Remember That the WHO is More Important than the WHAT. This means situating people in positions where they are not only capable of performing the work but also capable of accepting responsibility for the mistakes that happen under their care.
  • Hire Right, Because the Penalties for Hiring Wrong are Huge. Again, a candidate’s principles must align with the principles of the institution generally. Once a person becomes part of the organization, their role should be viewed as a position on a sports team – either they excel or get cut. Dalio encourages us to think about employees as people who we want to share our lives with, and so keeping quality employees becomes of utmost importance.
  • Constantly Train, Test, Evaluate and Sort People. According to Dalio, this means learning from both successes and failures. He writes, “Radical truth doesn’t require you to be negative all the time. Point out examples of jobs done well and the causes of their success. This reinforces the actions that lead to the results and creates role models for those who are learning” (p. 427). We do not, however, have to rehabilitate people who have dishonesty embedded in their character. Rather, employees whose characters come into question should be “trained, guard-railed, or removed” (p. 438).

• To Build and Evolve Your Machine. Dalio considers an institution a machine because with machines, we look at the output and call in appropriate experts when parts of the machine function improperly. People running institutions sometimes get caught up in the minutia, but Dalio has six strategies for focusing attention on larger goals and output:
  • Manage as Someone Operating a Machine to Achieve a Goal. A macro- or super-perspective is required to see the diverse mechanisms that make an institution work effectively because “great managers are not philosophers, entertainers, doers, or artists. They are engineers. They see their organizations as machines and work assiduously to maintain and improve them” (p. 451). As a conductor at the front of an orchestra, managers clearly assign responsibilities and do not get derailed by small mistakes. “Open-minded and assertive at the same time” (p. 465), great managers open themselves to criticism and probing to establish a continuous feedback loop that ensures the institution works constantly toward its goals. Rather than “confess,” Dalio uses the term “escalate” for what managers must do when they recognize their mistakes – escalate to the surface of the situation rather than conceal.
  • Perceive and Don’t Tolerate Problems. Managers who sacrifice greater goals for pats on the back risk falling into “frog in the boiling water syndrome” (p. 476), wherein the manager does not notice the problems that are arising because of the accolades. As Dalio writes, “People have a strong tendency to slowly get used to unacceptable things that would shock them if they saw them with fresh eyes” (p. 476).
  • Diagnose Problems to Get at Their Root Causes. Dalio encourages us to do this by asking either “why” or yes/no questions until a root cause can be determined. Once it has, institutions should hold individual persons responsible for those problems.
  • Design Improvements to Your Machine to Get Around Problems. Looking at institutions algorithmically should allow a manager to anticipate potential areas of concern. Again, failure should not be feared. As cleansing storms restore nature, “bad times that force cutbacks so only the strongest and most essential employees (or companies) survive are inevitable and can be great, even though they seem terrible at the time” (p. 502). The weakest tend to be those focused on minutia, so the manager’s role becomes that of an auditor who confirms that small tasks always align with the greater goals of the institution.
  • Do What You Set Out to Do. Keep the constituents of your institution excited about the goals at hand and celebrate when they are met.
  • Use Tools and Protocols to Shape How Work is Done. “Words alone aren’t enough,” this section begins. It is not enough to have solid goals; the institution must work ever diligently to implement them, both for the sake of attaining them and learning how to cope with failures along the way. As Dalio writes, “Johannes Gutenberg’s printing press allowed easy dissemination of knowledge that helped people build on each other’s learnings. But experiential learning is so much more powerful” (p. 526).
  • And For Heaven’s Sake, Don’t Overlook Governance! Governing bodies alter or remove processes or people when they function improperly, so a principle-based model of governance is essential for the wellbeing of the institution

Dalio, R. (2017). Principles. New York: Simon & Schuster.