Principles: Life and Work

by Ray Dalio

As for our agreements with each other, the most important one was our need to do three things: 1. Put our honest thoughts out on the table, 2. Have thoughtful disagreements in which people are willing to shift their opinions as they learn, and 3. Have agreed-upon ways of deciding (e.g., voting, having clear authorities) if disagreements remain so that we can move beyond them without resentments.

There are two parts of each person’s brain: the upper-level logical part and the lower-level emotional part. I call these the “two yous.” They fight for control of each person. How that conflict is managed is the most important driver of our behaviors. That fighting was the biggest reason for the problems Bob, Giselle, and Dan raised. While the logical part of people’s brains could easily understand that knowing one’s weaknesses is a good thing (because it’s the first step toward getting around them), the emotional part typically hates it.

wrestling with the markets, thinking independently and creatively about how to make our bets, making mistakes, bringing those mistakes to the surface, diagnosing them to get at their root causes, designing new and better ways of doing things, systematically implementing the changes, making new mistakes, and so on.

I knew which shifts in the economic environment caused asset classes to move around, and I knew that those relationships had remained essentially the same for hundreds of years. There were only two big forces to worry about: growth and inflation. Each could either be rising or falling, so I saw that by finding four different investment strategies—each one of which would do well in a particular environment (rising growth with rising inflation, rising growth with falling inflation, and so on)—I could construct an asset-allocation mix that was balanced to do well over time while being protected against unacceptable losses. Since that strategy would never change, practically anyone could implement it.

We needed a way to make the data that showed what people were like even clearer and more explicit, so I began making “Baseball Cards” for employees that listed their “stats.” The idea was that they could be passed around and referred to when assigning responsibilities. Just as you wouldn’t have a great fielder with a .160 batting average bat third, you wouldn’t assign a big-picture person a task requiring attention to details.

With so much changing so fast, it had seemed pointless to focus on getting everything “just right” when something newer and better was sure to come along.

To me, the greatest success you can have as the person in charge is to orchestrate others to do things well without you. A step below that is doing things well yourself, and worst of all is doing things poorly yourself.

While in this case we would have made more money if we were less balanced, we certainly wouldn’t have survived and succeeded long enough to be in such a position if we’d approached our investments in that way.

Investors think independently, anticipate things that haven’t happened yet, and put real money at stake with their bets. Policymakers come from environments that nurture consensus, not dissent, that train them to react to things that have already occurred, and that prepare them for negotiations, not placing bets.

As much as I love and have benefited from artificial intelligence, I believe that only people can discover such things and then program computers to do them. That’s why I believe that the right people, working with each other and with computers, are the key to success.

I figured that if they had great character, common sense, and creativity, and were driven to achieve our shared mission, they would discover what it took to be successful if I gave them the freedom to figure out how to make the right decisions.

My approach was to hire, train, test, and then fire or promote quickly, so that we could rapidly identify the excellent hires and get rid of the ordinary ones, repeating the process again and again until the percentage of those who were truly great was high enough to meet our needs.

The people who thrive say that while the period of adjustment is difficult, it is also joyous because of the excellence they achieve and the extraordinary relationships they make. And the ones who can’t or won’t adapt must be cut; this is essential to keeping Bridgewater excellent.

As with all organizations, whether Bridgewater would succeed would come down to the people and the culture. People who run companies are faced with important choices every day. How they make those choices determines the character of the company, the quality of its relationships, and the outcomes it produces.

It seems to me that life consists of three phases. In the first, we are dependent on others and we learn. In the second, others depend on us and we work. And in the third and last, when others no longer depend on us and we no longer have to work, we are free to savor life.

I knew that Lee Kuan Yew, the wise founder and leader of Singapore for forty-one years, had transitioned out of his leadership responsibilities to be a mentor, and I had seen how well that went. For all those reasons, I decided I would stay on as a mentor. That meant I would either not speak at all or speak last, but always be available to provide advice.

A shaper is someone who comes up with unique and valuable visions and builds them out beautifully, typically over the doubts and opposition of others. Jobs built the world’s largest and most successful company by revolutionizing computing, music, communications, animation, and photography with beautifully designed products. Elon Musk (of Tesla, SpaceX, and SolarCity), Jeff Bezos (of Amazon), and Reed Hastings (of Netflix) are other great shapers from the business world.

Isaacson’s book and the article pointed to other parallels in our backgrounds, goals, and approaches to shaping—for example, we were both rebellious, independent thinkers who worked relentlessly for innovation and excellence; we were both meditators who wanted to “put a dent in the universe”; and we were both notoriously tough on people.

It turns out they have a lot in common. They are all independent thinkers who do not let anything or anyone stand in the way of achieving their audacious goals. They have very strong mental maps of how things should be done, and at the same time a willingness to test those mental maps in the world of reality and change the ways they do things to make them work better. They are extremely resilient, because their need to achieve what they envision is stronger than the pain they experience as they struggle to achieve it. Perhaps most interesting, they have a wider range of vision than most people, either because they have that vision themselves or because they know how to get it from others who can see what they can’t. All are able to see both big pictures and granular details (and levels in between) and synthesize the perspectives they gain at those different levels, whereas most people see just one or the other. They are simultaneously creative, systematic, and practical. They are assertive and open-minded at the same time. Above all, they are passionate about what they are doing, intolerant of people who work for them who aren’t excellent at what they do, and want to have a big, beneficial impact on the world.

Take Elon Musk. When he had just come out with the Tesla and showed me his own car for the first time, he had as much to say about the key fob that opened the doors as he did about his overarching vision for how Tesla fits into the broader future of transportation and how important that is to our planet.

Later on, when I asked him how he came to start his company SpaceX, the audacity of his answer startled me. “For a long time,” he answered, “I’ve thought that it’s inevitable that something bad is going to happen on a planetary scale—a plague, a meteor—that will require humanity to start over somewhere else, like Mars. One day I went to the NASA website to see what progress they were making on their Mars program, and I realized that they weren’t even thinking about going there anytime soon. “I had gotten $180 million when my partners and I sold PayPal,” he continued, “and it occurred to me that if I spent $90 million and used it to acquire some ICBMs from the former USSR and sent one to Mars, I could inspire...

At times, their extreme determination to achieve their goals can make them appear abrasive or inconsiderate, which was reflected in their test results. Nothing is ever good enough, and they experience the gap between what is and what could be as both a tragedy and a source of unending motivat...

Through this investigative process, I learned that there are distinctly different types of shapers. The most important difference lies in whether their shaping comes in the form of inventing, managing, or both. For example, while Einstein shaped by inventing, he didn’t have to manage, and while Jack Welch (who ran GE) and Lou Gerstner (who ran IBM) were great managers/leaders of people, they didn’t have to be as inventive. The rarest cases were people like Jobs, Musk, Gates, and Bezos, who were inventive visionaries and managed big organizations to build those visions out.

My examination of shapers and my reflections on my own qualities made clear to me that nobody sees the full range of what they need to see in order to be exceptionally successful, though some see a wider range than others. Those that do best both see a wide range themselves while triangulating well with other brilliant people who see things in different, complementary ways.

This exercise reminded me that there are far fewer types of people in the world than there are people and far fewer different types of situations than there are situations, so matching the right types of people to the right types of situations is key.

One of the great things about algorithmic decision making is that it focuses people on cause-effect relationships and, in that way, helps foster a real idea meritocracy. When everyone can see the criteria the algorithms use and have a hand in developing them, they can all agree that the system is fair and trust the computer to look at the evidence, make the right assessments about people, and assign them the right authorities. The algorithms are essentially principles in action on a continuous basis.

Just as all human bodies work in essentially the same way, so do the economic machines in different countries. And just as physical diseases infect people without regard to nationality, so do economic diseases.

Yet even when I did succeed in helping them see the linkages, the political decision-making systems they had to work within were dysfunctional.

During the next couple of years, over considerable objections, he and his government pushed these controversial reforms through. He never got the praise he deserved, but he didn’t care because his satisfaction came from seeing the results he produced. To me, that is a hero.

The ECB’s decision was obviously the right thing to do, for reasons that were relatively simple. But seeing how controversial its move was, it occurred to me that the world needed a simple explanation of how the economic machine works, because if everyone understood the basics, then economic policymakers would be able to do the right things a lot faster and with less angst in the future. That led me to make a thirty-minute video, How the Economic Machine Works, which I released in 2013. Besides explaining how the economy works it provides a template that helps people assess their economies and gives them guidance about what to do and what to expect during a crisis.

From my contacts with policymakers in a number of countries I learned quite a bit about how international relations really works. It is quite different from what most people imagine. Countries behave in a more self-interested and less considerate way than what most of us would consider appropriate for individuals. When countries negotiate with one another, they typically operate as if they are opponents in a chess match or merchants in a bazaar in which maximizing one’s own benefit is the sole objective. Smart leaders know their own countries’ vulnerabilities, take advantage of others’ vulnerabilities, and expect the other countries’ leaders to do the same.

most people who see the world through the lens of the media tend to look for who is good and who is evil rather than what the vested interests and relative powers are and how they are being played out. For example, people tend to embrace stories about how their own country is moral and the rival country is not, when most of the time these countries have different interests that they are trying to maximize. The best behaviors one can hope for come from leaders who can weigh the benefits of cooperation, and who have long enough time frames that they can see how the gifts they give this year may bring them benefits in the future.

I came to respect most of the policymakers I worked with and to feel sorry for them because of the terrible positions they were in. Most are highly principled people who are forced to operate in unprincipled environments. The job of a policymaker is challenging under the best of circumstances, and it’s almost impossible during a crisis. The politics are horrendous and distortions and outright misinformation from the media make things worse.

In brief, Wang is a historian, a very high-level thinker, and a very practical man. I have rarely known a person to be both extremely wise and extremely practical. A leading shaper of the Chinese economy for decades who is also responsible for eliminating corruption, he is known to be a no-nonsense man who can be trusted to get stuff done.

I gave Wang a copy of Joseph Campbell’s great book The Hero with a Thousand Faces, because he is a classic hero and I thought it might help him. I also gave him The Lessons of History, a 104-page distillation of the major forces through history by Will and Ariel Durant, and River Out of Eden by the insightful Richard Dawkins, which explains how evolution works. He gave me Georgi Plekhanov’s classic On the Role of the Individual in History. All these books showed how the same things happened over and over again throughout history.

“Unattainable goals appeal to heroes,” he once told me. “Capable people are those who sit there worrying about the future. The unwise are those who worry about nothing. If conflicts got resolved before they became acute, there wouldn’t be any heroes.”

For Campbell, a “hero” isn’t a perfect person who always gets things right. Far from it. A hero is someone who “found or achieved or [did] something beyond the normal range of achievement,” and who “has given his life to something bigger than himself or other than himself.” I had met a number of such people throughout my life. What was most interesting about Campbell’s work was his description of how they got that way. Heroes don’t begin as heroes; they just become them because of the way one thing leads to another.

They typically start out leading ordinary lives in an ordinary world and are drawn by a “call to adventure.” This leads them down a “road of trials” filled with battles, temptations, successes, and failures. Along the way, they are helped by others, often by those who are further along the journey and serve as mentors, though those who are less far along also help in various ways. They also gain allies and enemies and learn how to fight, often against convention. Along the way, they encounter temptations and have clashes and reconciliations with their fathers and their sons. They overcome their fear of fighting because of their great determination to achieve what they want, and they gain their “special powers” (i.e., skills) from both “battles” that test and teach them, and from gifts (such as advice) that they receive from others. Over time, they both succeed and fail, but they increasingly succeed more than they fail as they grow stronger and keep striving for more, which leads to ever-bigger and more challenging battles.

Heroes inevitably experience at least one very big failure (which Campbell calls an “abyss” or the “belly of the whale” experience) that tests whether they have the resilience to come back and fight smarter and with more determination. If they do, they undergo a change (have a “metamorphosis”) in which they experience the fear that protects them, without losing the aggressiveness that propels them forward. With triumphs come rewards. Though they don’t realize it when they are in their battles, the hero’s biggest rewa...

Late in life, winning more battles and acquiring more rewards typically becomes less exciting to heroes than passing along that knowledge to others—“returning the boon” as Campbell called it. Once the boon is returned, the hero is free to live and then free to die, or, as I see it, to transition from the second phase in life to the third phase (in which one is free to savor life until one passes away).

Reading Campbell, I saw that heroes, like shapers, come in varying sizes—there are big ones and small ones—that they are real people, and that we all know some. I also saw that being a hero is typically not all it’s cracked up to be—they get beat up a lot, and many are attacked, humiliated, or killed even after they triumph. In fact, it’s hard to see the logic for choosing this hero role, if one were to choose. But I could see and relate to how a certain type of person would start and stay on that path.

We view our donations as investments and want to make sure that we have high philanthropic returns on our money. So another big question we wrestle with is how to measure those returns. It’s much easier to measure efficiency in a business by seeing how much its revenue exceeds its cost. Because of this, we developed an attraction to sustainable social enterprises. Still, I saw that so many philanthropic investments could pay off economically as well as socially, and it tormented me that our society passes them up.

A community in which you always have the right and obligation to make sense of things and a process for working yourselves through disagreements—i.e., a real, functioning idea meritocracy. I want you to think, not follow—while recognizing that you can be wrong and that you have weaknesses—and I want to help you get the most likely best answers, even if you personally don’t believe that they’re the best answers. I want to give you radical open-mindedness and an idea meritocracy that will take you from being trapped in your own heads to having access to the best minds in the world to help you make the best decisions for you and for our community. I want to help you all struggle well and evolve to get the most out of life.

In Germany politics are like everywhere else in that there are opposing forces that struggle with each other and decisions are made via a mix of power and negotiation. This makes it desirable to know who has what power and is willing to negotiate what.

I don’t believe that those who are “heroes” or “shapers” are either better people or are on better paths. It’s perfectly sensible to not have any desire to go on such a journey. I believe that what’s most important is to know one’s own nature and operate consistently with it.

Perhaps the best advice we received came from management expert Jim Collins, who told us that “to transition well, there are only two things that you need to do: Put capable CEOs in place and have a capable governance system to replace the CEOs if they’re not capable.”

Watching the same things happen again and again, I began to see reality as a gorgeous perpetual motion machine, in which causes become effects that become causes of new effects, and so on.

Having the basics—a good bed to sleep in, good relationships, good food, and good sex—is most important, and those things don’t get much better when you have a lot of money or much worse when you have less.

I cannot say that having an intense life filled with accomplishments is better than having a relaxed life filled with savoring, though I can say that being strong is better than being weak, and that struggling gives one strength. My nature being what it is, I would not have changed my life, but I can’t tell you what is best for you. That is for you to choose. What I have seen is that the happiest people discover their own nature and match their life to it.

I realized that passing on knowledge is like passing on DNA—it is more important than the individual, because it lives way beyond the individual’s life.