Principles: Life and Work

by Ray Dalio

memory and processing speed tend to be the abilities that determine success in school, so school performance is an excellent gauge of these qualities. School performance is also a good gauge of a person’s determination to succeed, as well as their willingness and ability to follow directions. But when it comes to assessing a candidate’s common sense, vision, creativity, or decision-making abilities, school records are of limited value.

impractical idealists are dangerous and destructive, whereas practical idealists make the world a better place. To be practical one needs to be a realist—to know where people’s interests lie and how to design machines that produce results, as well as metrics that measure those benefits in relation to the costs.

The person who is capable but doesn’t have good character is generally destructive, because he or she has the cleverness to do you harm and will certainly erode the culture.

The person with good character and poor abilities also creates problems. While likable, he or she won’t get the job done and is painfully difficult to fire because doing so feels like shooting the loyal dog you can’t afford to keep anymore—but he must go.

In every relationship, there comes a point when you must decide whether you are meant for each other—that’s common in private life and at any organization that holds high standards.

Every leader must decide between 1) getting rid of liked but incapable people to achieve their goals and 2) keeping the nice but incapable people and not achieving their goals. Whether or not you can make these hard decisions is the strongest determinant of your own success or failure.

Instead of micromanaging, you should be training and testing. Give people your thoughts on how they might approach their decisions, but don’t dictate to them. The most useful thing you can do is to get in sync with them, exploring how they are doing things and why.

Feedback should reflect what is succeeding and what is not in proportion to the actual situation, rather than in an attempt to balance compliments and criticisms.

Think about accuracy, not implications. It’s often the case that someone receiving critical feedback gets preoccupied with the implications of that feedback instead of whether it’s true. This is a mistake.

Help others through this by giving feedback in a way that makes it clear that you’re just trying to understand what’s true. Figuring out what to do about it is a separate discussion.

Even great hitters are going to strike out many times, and it would be foolish to evaluate them based on one trip to the plate. That’s why stats like on-base percentage and batting average exist. In other words, any one event has many different possible explanations, whereas a pattern of behavior can tell you a lot about root causes.

Encourage people to be objectively reflective about their performance.

If there are performance issues, it is either because of design problems (perhaps the person has too many responsibilities) or fit/abilities problems. If the problems are due to the person’s inabilities, these inabilities are either because of the person’s innate weaknesses in doing that job (e.g., someone who’s five foot two probably shouldn’t be a center on the basketball team) or because of inadequate training. A good review, and getting in sync throughout the year, should get at these things.

What matters most is not just outcomes but how responsibilities were handled.

Remember that when it comes to assessing people, the two biggest mistakes you can make are being overconfident in your assessment and failing to get in sync on it. If you believe that something is true about someone, it’s your responsibility to make sure that it is true and that the person you’re assessing agrees.

When facing a change, ask yourself: Am I being open-minded? Or am I being resistant?

Ultimately, to help people succeed you have to do two things: First let them see their failures so clearly that they are motivated to change them, and then show them how to either change what they are doing or rely on others who are strong where they are weak. While doing the first without the second can be demoralizing to the people you are trying to help, doing them both should be invigorating, especially when they start experiencing the benefits.

Recognize that when you are really in sync with someone about their weaknesses, the weaknesses are probably true.

When you do agree, make a formal record of it. This information will be a critical building block for future success.

Always ask yourself if you would have hired them for that job knowing what you know now. If not, get them out of the job. d. Evaluate employees with the same rigor as you evaluate job candidates.

Train, guardrail, or remove people; don’t rehabilitate them. Training is part of a plan to develop people’s skills and help them evolve. Rehabilitation is an attempt to create significant changes in people’s values and/or abilities. Since values and abilities are difficult to change, rehabilitation is typically impractical.

if you are expecting people to be much better in the near future than they have been in the past, you are probably making a serious mistake.

Don’t collect people. It is much worse to keep someone in a job unsuitable for them than it is to fire or reassign them. Consider the enormous costs of not firing someone unsuited for a job: the costs of bad performance; the time and effort wasted trying to train them; and the greater pain of firing someone who’s been around awhile (say, five years or more) compared with letting someone go after just a year. Keeping people in jobs they are not suited for is terrible for them because it allows them to live in a false reality while holding back their personal evolution, and it is terrible for the community because it compromises the meritocracy and everyone pays the price. Don’t let yourself be held hostage to anyone; there is always someone else. Never compromise your standards or let yourself be squeezed.

Be cautious about allowing people to step back to another role after failing. Note I said “be cautious.” I didn’t say never, because it depends on the circumstances. On the one hand, you want people to stretch themselves and experiment with new jobs. You don’t want to get rid of a great person just because he or she tried something new and failed. But on the other hand, if you look at most people in this situation, by and large you’ll regret allowing them to step back. There are three reasons for this: 1) You’re giving up a seat for someone else who might be able to advance, and people who can advance are better to have than people who can’t; 2) The person stepping back could continue to want to do what they aren’t capable of doing, so there’s a real risk of them job slipping into work they’re not a fit for; 3) The person may experience a sense of confinement and resentment being back in a job that they probably can’t advance beyond. Keeping them is generally viewed as the preferable short-run decision but in the long run it’s probably the wrong thing to do.

Most people get caught up in the blizzard of things coming at them. In contrast, successful people get above the blizzard so they can see the causes and effects at play.

Once you understand how to build and run your machine, your next objective is to figure out how to improve it. We do this through the 5-Step Process I described as 1) identifying our goals, 2) encountering our problems; 3) diagnosing those problems to get at their root causes; 4) designing changes to get around the problems; and 5) doing what is needed.

To be effective, you must look down upon your machines as would an organizational engineer, comparing the outputs with the goals, and constantly modifying the people and the designs to make the outputs better.

you and the people you work with must be clear on how your lower-level goals—whether they’re to produce things cost-effectively, achieve high customer satisfaction, help a certain number of people in need, whatever—grow out of your higher-level goals and values. No matter how good you are at design, your machine will have problems. You or some other capable mechanic needs to identify those problems and look under the hood of the machine to diagnose their root causes.

a. Constantly compare your outcomes to your goals.

Whenever you identify a problem with your machine, you need to diagnose whether it is the result of a flaw in its design or in the way your people are handling their responsibilities.

Understand that a great manager is essentially an organizational engineer. 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. They create process-flow diagrams to show how the machine works and to evaluate its design. They build metrics to light up how well each of the individual parts of the machine (most importantly, the people) and the machine as a whole are working. And they tinker constantly with its designs and its people to make both better.

If your metrics are good enough, you can gain such a complete and accurate view of what your people are doing and how well they are doing it that you can almost manage via the metrics alone.

b. When a problem occurs, conduct the discussion at two levels: 1) the machine level (why that outcome was produced) and 2) the case-at-hand level (what to do about it). Don’t make the mistake of just having the case-at-hand discussion, because then you are micromanaging

Understand the differences between managing, micromanaging, and not managing. Great managers orchestrate rather than do. Like the conductor of an orchestra, they do not play an instrument, but direct their people so that they play beautifully together. Micromanaging, in contrast, is telling the people who work for you exactly what tasks to do or doing their tasks for them. Not managing is having them do their jobs without your oversight and involvement.

You should be able to delegate the details. If you keep getting bogged down in details, you either have a problem with managing or training, or you have the wrong people doing the job. The real sign of a master manager is that he doesn’t have to do practically anything. Managers should view the need to get involved in the nitty-gritty as a bad sign. At the same time, there’s danger in thinking you’re delegating details when you’re actually being too distant from what’s important and essentially are not managing. Great managers know the difference. They strive to hire, train, and oversee in a way in which others can superbly handle as much as possible on their own.

Know what your people are like and what makes them tick, because your people are your most important resource. Develop a full profile of each person’s values, abilities, and skills.

Regularly take the temperature of each person who is important to you and to the organization. Probe your key people and urge them to bring up anything that might be bothering them.

Probe deep and hard to learn what you can expect from your machine. Constantly probe the people who report to you while making sure they understand that it’s good for them and everyone else to surface their problems and mistakes.

Welcome probing. It’s important to welcome probing of yourself because no one can see themselves objectively. When you are being probed, it’s essential to stay calm. Your emotional “lower-level you” will probably react to probing with something like, “You’re a jerk because you’re against me and making me feel bad,” whereas your thoughtful “higher-level you” should be thinking, “It’s wonderful that we can be completely honest like this and have such a thoughtful exchange to help assure that I’m doing things well.”

Prioritization can be a trap if it causes you to ignore the problems around you. Allowing small problems to go unnoticed and unaddressed creates the perception that it’s acceptable to tolerate such things. Imagine that all your little problems are small pieces of trash you’re stepping over to get to the other side of a room. Sure, what’s on the other side of the room may be very important, but it won’t hurt you to pick up the trash as you come to it, and by reinforcing the culture of excellence it will have positive second- and third-order consequences that will reverberate across your whole organization.

Think like an owner, and expect the people you work with to do the same. It’s a basic reality that if you don’t experience the consequences of your actions, you’ll take less ownership of them. If you are an employee, and you get a paycheck for turning up and pleasing your boss, your mind-set will inevitably be trained to this cause-effect relationship. If you are a manager, make sure you structure incentives and penalties that encourage people to take full ownership of what they do and not just coast by.

10.8 Recognize and deal with key-man risk. Every key person should have at least one person who can replace him or her.

Personal contact at times of personal difficulty is a must.

This traditional relationship between “leaders” and “followers” is the opposite of what I believe is needed to be most effective, and being maximally effective is the most important thing a “leader” must do. It is more practical to be honest about one’s uncertainties, mistakes, and weaknesses than to pretend they don’t exist. It is also more important to have good challengers than good followers. Thoughtful discussion and disagreement is practical because it stress-tests leaders and brings what they are missing to their attention.

The most effective leaders work to 1) open-mindedly seek out the best answers and 2) bring others along as part of that discovery process.

Don’t give orders and try to be followed; try to be understood and to understand others by getting in sync.

Hold yourself and your people accountable and appreciate them for holding you accountable.

If you’ve agreed with someone that something is supposed to go a certain way, make sure it goes that way—unless you get in sync about doing it differently. People will often subconsciously gravitate toward activities they like rather than what’s required.

If you didn’t make an expectation clear, you can’t hold people accountable for it not being fulfilled.

Problems are like coal thrown into a locomotive engine because burning them up—inventing and implementing solutions for them—propels us forward. Every problem you find is an opportunity to improve your machine.