Principles: Life and Work

by Ray Dalio

Look to the patterns of those things that affect you in order to understand the cause-effect relationships that drive them and to learn principles for dealing with them effectively.

I have found it helpful to think of my life as if it were a game in which each problem I face is a puzzle I need to solve. By solving the puzzle, I get a gem in the form of a principle that helps me avoid the same sort of problem in the future. Collecting these gems continually improves my decision making, so I am able to ascend to higher and higher levels of play in which the game gets harder and the stakes become ever greater.

Just as long-distance runners push through pain to experience the pleasure of “runner’s high,” I have largely gotten past the pain of my mistake making and instead enjoy the pleasure that comes with learning from it. I believe that with practice you can change your habits and experience the same “mistake learner’s high.”

Truth—or, more precisely, an accurate understanding of reality—is the essential foundation for any good outcome.

Be radically open-minded and radically transparent.

To be “good” something must operate consistently with the laws of reality and contribute to the evolution of the whole; that is what is most rewarded. For example, if you come up with something the world values, you almost can’t help but be rewarded. Conversely, reality tends to penalize those people, species, and things that don’t work well and detract from evolution.

Evolution is the single greatest force in the universe; it is the only thing that is permanent and it drives everything.18 Everything from the smallest subatomic particle to the entire galaxy is evolving. While everything apparently dies or disappears in time, the truth is that it all just gets reconfigured in evolving forms. Remember that energy can’t be destroyed—it can only be reconfigured. So the same stuff is continuously falling apart and coalescing in different forms. The force behind that is evolution.

Evolution consists of adaptations/inventions that provide spurts of benefits that decline in value. That painful decline leads either to new adaptations and new inventions that bring new products, organizations, and human capabilities to new and higher levels of development (as shown in the top diagram on the facing page); or decline and death, which looks like the diagram at bottom left.

All machines eventually break down, decompose, and have their parts recycled to create new machines. That includes us. Sometimes this makes us sad because we’ve become attached to our machines, but if you look at it from the higher level, it’s really beautiful to observe how the machine of evolution works.

perfection doesn’t exist; it is a goal that fuels a never-ending process of adaptation. If nature, or anything, were perfect it wouldn’t be evolving. Organisms, organizations, and individual people are always highly imperfect but capable of improving. So rather than getting stuck hiding our mistakes and pretending we’re perfect, it makes sense to find our imperfections and deal with them. You will either learn valuable lessons from your mistakes and press on, better equipped to succeed—or you won’t and you will fail.

Evolving is life’s greatest accomplishment and its greatest reward.

One of the great marvels of nature is how the whole system, which is full of individual organisms acting in their own self-interest and without understanding or guiding what’s going on, can create a beautifully operating and evolving whole. While I’m not an expert at this, it seems that it’s because evolution has produced a) incentives and interactions that lead to individuals pursuing their own interests and resulting in the advancement of the whole, b) the natural selection process, and c) rapid experimentation and adaptation.

we are unbelievably tiny and short-lived and no matter what we accomplish, our impact will be insignificant. At the same time, we instinctually want to matter and to evolve, and we can matter a tiny bit—and it’s all those tiny bits that add up to drive the evolution of the universe.

When I began to look at reality through the perspective of figuring out how it really works, instead of thinking things should be different, I realized that most everything that at first seemed “bad” to me—like rainy days, weaknesses, and even death—was because I held preconceived notions of what I personally wanted. With time, I learned that my initial reaction was because I hadn’t put whatever I was reacting to in the context of the fact that reality is built to optimize for the whole rather than for me.

Though most people think that they are striving to get the things (toys, bigger houses, money, status, etc.) that will make them happy, for most people those things don’t supply anywhere near the long-term satisfaction that getting better at something does.

If you can develop a reflexive reaction to psychic pain that causes you to reflect on it rather than avoid it, it will lead to your rapid learning/evolving.

Though this process of pushing your limits, of sometimes failing and sometimes breaking through—and deriving benefits from both your failures and your successes—is not for everyone, if it is for you, it can be so thrilling that it becomes addictive. Life will inevitably bring you such moments, and it’ll be up to you to decide whether you want to go back for more.

If you choose to push through this often painful process of personal evolution, you will naturally “ascend” to higher and higher levels. As you climb above the blizzard of things that surrounds you, you will realize that they seem bigger than they really are when you are seeing them up close; that most things in life are just “another one of those.” The higher you ascend, the more effective you become at working with reality to shape outcomes toward your goals. What once seemed impossibly complex becomes simple.

No matter what you want out of life, your ability to adapt and move quickly and efficiently through the process of personal evolution will determine your success and your happiness. If you do it well, you can change your psychological reaction to it so that what was painful can become something you crave.

Quite often the first-order consequences are the temptations that cost us what we really want, and sometimes they are the barriers that stand in our way. It’s almost as though nature sorts us by throwing us trick choices that have both types of consequences and penalizing those who make their decisions on the basis of the first-order consequences alone.

Whatever circumstances life brings you, you will be more likely to succeed and find happiness if you take responsibility for making your decisions well instead of complaining about things being beyond your control. Psychologists call this having an “internal locus of control,” and studies consistently show that people who have it outperform those who don’t.

One of the hardest things for people to do is to objectively look down on themselves within their circumstances (i.e., their machine) so that they can act as the machine’s designer and manager. Most people remain stuck in the perspective of being a worker within the machine. If you can recognize the differences between those roles and that it is much more important that you are a good designer/manager of your life than a good worker in it, you will be on the right path.

The biggest mistake most people make is to not see themselves and others objectively, which leads them to bump into their own and others’ weaknesses again and again.

Successful people are those who can go above themselves to see things objectively and manage those things to shape change.

if you as the designer/manager discover that you as the worker can’t do something well, you need to fire yourself as the worker and get a good replacement, while staying in the role of designer/manager of your own life. You shouldn’t be upset if you find out that you’re bad at something—you should be happy that you found out, because knowing that and dealing with it will improve your chances of getting what you want.

If you are disappointed because you can’t be the best person to do everything yourself, you are terribly naive. Nobody can do everything well. Would you want to have Einstein on your basketball team? When he fails to dribble and shoot well, would you think badly of him? Should he feel humiliated? Imagine all the areas in which Einstein was incompetent, and imagine how hard he struggled to excel even in the areas in which he was the best in the world.

Asking others who are strong in areas where you are weak to help you is a great skill that you should develop no matter what, as it will help you develop guardrails that will prevent you from doing what you shouldn’t be doing.

Because it is difficult to see oneself objectively, you need to rely on the input of others and the whole body of evidence.

I urge you to reflect on whether what you are going after is consistent with your nature. Whatever your nature is, there are many paths that will suit you, so don’t fixate on just one. Should a particular path close, all you have to do is find another good one consistent with what you’re like.

most people lack the courage to confront their own weaknesses and make the hard choices that this process requires. Ultimately, it comes down to the following five decisions: 1. Don’t confuse what you wish were true with what is really true. 2. Don’t worry about looking good—worry instead about achieving your goals. 3. Don’t overweight first-order consequences relative to second- and third-order ones. 4. Don’t let pain stand in the way of progress. 5. Don’t blame bad outcomes on anyone but yourself.

Of course, we are often satisfied with the same things—relationships, careers, etc.—but when that is the case, it is typically because we are getting new enjoyments from the changing dimensions of those things.

It seems to me that the personal evolutionary process—the looping I described in the last chapter—takes place in five distinct steps. If you can do those five things well, you will almost certainly be successful. Here they are in a nutshell: 1. Have clear goals. 2. Identify and don’t tolerate the problems that stand in the way of your achieving those goals. 3. Accurately diagnose the problems to get at their root causes. 4. Design plans that will get you around them. 5. Do what’s necessary to push these designs through to results.

Never rule out a goal because you think it’s unattainable. Be audacious. There is always a best possible path. Your job is to find it and have the courage to follow it. What you think is attainable is just a function of what you know at the moment. Once you start your pursuit you will learn a lot, especially if you triangulate with others; paths you never saw before will emerge.

Remember that great expectations create great capabilities. If you limit your goals to what you know you can achieve, you are setting the bar way too low.

View painful problems as potential improvements that are screaming at you.

When a problem stems from your own lack of talent or skill, most people feel shame. Get over it. I cannot emphasize this enough: Acknowledging your weaknesses is not the same as surrendering to them. It’s the first step toward overcoming them. The pains you are feeling are “growing pains” that will test your character and reward you as you push through them.

Once you identify a problem, don’t tolerate it. Tolerating a problem has the same consequences as failing to identify it.

Focus on the “what is” before deciding “what to do about it.” It is a common mistake to move in a nanosecond from identifying a tough problem to proposing a solution for it. Strategic thinking requires both diagnosis and design.

Distinguish proximate causes from root causes. Proximate causes are typically the actions (or lack of actions) that lead to problems, so they are described with verbs (I missed the train because I didn’t check the train schedule). Root causes run much deeper and they are typically described with adjectives (I didn’t check the train schedule because I am forgetful).

More than anything else, what differentiates people who live up to their potential from those who don’t is their willingness to look at themselves and others objectively and understand the root causes standing in their way.

Think about your problem as a set of outcomes produced by a machine. Practice higher-level thinking by looking down on your machine and thinking about how it can be changed to produce better outcomes.

Sketch out the plan broadly at first (e.g., “hire great people”) and then refine it. You should go from the big picture and drill down to specific tasks and estimated time lines (e.g., “In the next two weeks, choose the headhunters who will find those great people”). The real-world issues of costs, time, and personnel will undoubtedly surface as you do this, and that will lead you to further refine your design until all the gears in the machine are meshing smoothly.

Too many people make the mistake of spending virtually no time on designing because they are preoccupied with execution. Remember: Designing precedes doing!

There are many successful, creative people who aren’t good at execution. They succeed because they forge symbiotic relationships with highly reliable task-doers.

Remember that weaknesses don’t matter if you find solutions.

There are two paths to success: 1) to have what you need yourself or 2) to get it from others. The second path requires you to have humility. Humility is as important, or even more important, as having the strengths yourself. Having both is best.

The two biggest barriers to good decision making are your ego and your blind spots. Together, they make it difficult for you to objectively see what is true about you and your circumstances and to make the best possible decisions by getting the most out of others.

Once you understand how your a) logical/conscious you and b) emotional/subconscious you fight with each other, you can imagine what it’s like when your two yous deal with other people and their own two “thems.”

To be effective you must not let your need to be right be more important than your need to find out what’s true. If you are too proud of what you know or of how good you are at something you will learn less, make inferior decisions, and fall short of your potential.

closed-mindedness is terribly costly; it causes you to miss out on all sorts of wonderful possibilities and dangerous threats that other people might be showing you—and it blocks criticism that could be constructive and even lifesaving.