The latest in our series that uses the ‘book review’ format as a springboard into a wider conversation about the world of work—and how to do it better.
Principles: Life & Work by Ray Dalio
‘Principles,’ says Ray Dalio, founder of the world’s most successful hedge fund, ‘are ways of successfully dealing with reality to get what you want out of life.’ His stated personal goal of ‘meaningful work and meaningful relationships’ is one most of us could subscribe to, and his fundamental question is: ‘Are you willing to fight to find out what’s true?’ By the end of his book, you may wonder if you’ve been fighting hard enough.
The first part of Principles is a context-setting memoir. Dalio tells how, as a teen, he put his caddying money into some stocks and saw them triple in value almost overnight. It was dumb luck, but he was hooked. Frustrated by rote learning at high school, he thrived at the local college and later attended Harvard Business School. After a stint as a commodities trader at Merrill Lynch, he started his own investment firm and had great success before spectacularly backing the wrong horse during the Latin American debt crisis of the late 1970s. As a self-confessed ‘arrogant’ 34-year-old, he even testified before Congress about why a bear market was on the way, before events proved him completely wrong. He had to lay off his staff and even borrow $4,000 from his father to pay his family bills.
This painful failure changed his outlook and set him on a new path. Dalio said to himself: ‘Rather than thinking “I’m right,” ask the question: “How do I know I’m right?”’ To make money as an investor, he knew he had to bet against prevailing opinion and be right. After all, as he puts it, ‘the consensus is already baked into the price’. So his quest became to find the smartest people possible who would be unafraid to disagree with him, then use their combined powers of reasoning to distinguish truth from opinion and conjecture. His rise, fall, and rise again is the story of Bridgewater Associates, the world’s largest hedge fund.
Incidentally, Dalio was also one of the few voices to anticipate the Global Financial Crisis of 2007-8 which brought Bridgewater into the spotlight. He decided to release, for free on the internet, a document he’d meticulously compiled, listing two hundred or so ‘principles’, previously only available to employees. After it was downloaded over 3 million times, he decided to expand them with even more rigour into the published version. The book’s second part is called ‘Life Principles’ and the final section is ‘Work Principles’.
The quest for truth
Dalio designed his organisation to be an ‘idea meritocracy’, or ‘let the best idea win’. It’s not an autocracy, where he would make the decisions, nor is it a democracy. When it comes to determining the principles which underlie any given situation, such as whether or not a given asset class will rise or fall, everyone gets a say. Crucially, though, not everyone’s say is equal. The views of those with a track record of success are given more weight than someone with less experience or knowledge. In fact, everyone has a ‘believability rating’—and everyone can see everyone else’s rating in a kind of ‘baseball card’ listing a lot of other attributes. It’s all about understanding ‘how other people are wired’ so they can understand their colleagues’ humanness and fallibility. And their own. Patented apps such as the Dot Collector, in which people rate everyone else in a meeting in real time, add to the firm’s mystique.
All this stems from the two necessary conditions Dalio proposed for the development of a culture that could support an idea meritocracy—radical truthfulness and radical transparency. In most organisations, these commodities are in very short supply, as is his dogged persistence in getting down to root causes. It is the human power to reason that allows us to achieve great things. Yet too often satisficing using proximate causes gets in the way of clear thinking. In tracking causation through Socratic inquiry (‘Why do you think that?’ ‘What could we assume instead?’ ‘How is this similar to another decision?’), Dalio shares much with Eli Goldratt (see my post on It’s Not Luck).
‘Triangulating your view with believable people who are willing to disagree’ is how he believes we get at the truth of a situation. And ‘thoughtful disagreement’ is something few people are able to pursue, he contends, because emotions get in the way. Dalio credits Transcendental Meditation as an aid to ‘getting above’ his own emotions. For a non-academic, he has also dived deep into neuroscience and psychology; the reading list at the book’s end offers a great survey of current thinking that any of us can learn from without a specialist background.
I was pleased to see that Bridgewater uses Elliot Jaques’ Stratified Systems Theory as one of its tools for categorising people’s capabilities, although it’s only mentioned in passing. While we tend to accept that people have different natural physical attributes, such as height, strength or hand-eye coordination, most of us instinctively shy away from the idea that people have different cognitive horsepower. Jaques, though, offers ‘modes of thinking’ that relate to an individual’s ability to handle complexity and different time horizons, collected from thousands of data points. (But more on him in a later article.)
“Those are my principles, and if you don’t
like them…well, I have others.”—Groucho Marx
Unusually for a CEO, Dalio has opened up his business to outside academic scrutiny, with case studies appearing in Adam Grant’s Originals, Robert Kegan’s An Everyone Culture and Edward Hess’s Learn or Die. All experienced the culture firsthand, sitting in on meetings in which people’s performance was criticised and the details shared to anyone curious to know.
Hess found that when he later shared Dalio’s principles in 2013 with ‘sixty-five smart, second-year MBA students’ and asked if they would like to work in a company like that, only three actually raised their hands. People who have excelled academically—always being praised and experiencing little failure along the way—seem to have a harder time accepting criticism when it comes. And it comes to everyone. In fact, employee retention is one of Dalio’s top areas of focus as he moves into a mentoring role. According to Hess, about 25% of new hires leave within 18 months. Bridgewater’s challenge is to find enough smart people who believe in radical transparency. Talk of ‘getting in sync’ can indeed make Bridgewater sound like it puts the ‘cult’ in culture. But my feeling is that such phrases are more like a shorthand, mantras that help speed things along for the people concerned.
Hess goes as far as to say that, by embracing scientific developments in learning, Dalio has furthered Peter Senge’s work set out in The Fifth Discipline (a standard text here at Ensemble), stressing Dalio’s focus on the ‘feedback loop’ and stating that ‘the rate and quality of an organization’s improvement and learning is highly dependent on how effectively and quickly it can process feedback loops’.
Pain + Reflection = Progress
In Originals, Adam Grant does challenge Dalio on having so many principles, not so much accusing him of the Groucho Marx quip as citing evidence that ‘the more principles you have, the greater the odds that employees focus on different values or interpret the same values differently’. Dalio’s response is that ‘a principle is just some type of event happening over and over again and how to deal with that event. Life consists of billions of these events, and if you can go from those billions to 250, you can make the connection, “Ah, this is one of those.”’ Dalio did agree, however, that the hierarchy of principles could be clearer; some are more important than others.
Dalio claims his principles can apply to any organisation and, indeed, to life in general. Reading the book, I was constantly caught between thinking that, on the one hand, these are great ideas while on the other questioning what it would really take to be radically truthful and transparent. I’ve always run Ensemble on the basis of open communication, for example, opening up our books and proposals to anyone in the organisation. I confess, though, that the idea of recording every significant meeting for anyone’s ears would be a challenge. Possibly so much recording actually allows some things to hide in plain sight. After all, who will take the trouble to sift through it all?
If I have a quibble with Dalio’s style it’s his propensity to imagine that every aspect of human endeavour can be reduced to an algorithm. He sees the organisation as a machine. As a systems thinker and engineer myself, I applaud his determination to understand how every element of the system interacts, but I find the metaphor overly mechanistic. In Team of Teams, Stanley McChrystal presents leadership in terms of being a gardener who prepares the soil and plants the seeds. This resonates more with my view that human beings and social systems shouldn’t be reduced to cogs in a big predictive machine. But Dalio’s storytelling belies that thought and he’s so passionate about his principles—even while inviting you to challenge his ideas with your own—that it’s easy to see past the negative connotations of the metaphor and accept the underlying message.
A final observation: although Bridgewater has been criticised by several journalists who sought out disgruntled ex-employees for stories of cultish devotion and boorish behaviour, the three leading academics in the organisational learning field mentioned above all left the firm with the highest opinions of Dalio and the ‘unique culture’ he had built. In the end, you’ll have to judge for yourself. Which is exactly what Ray Dalio would like you to do.
Questions to think about:
• Have you spent any significant time thinking about your own principles?
• Do you write down your reasons for making decisions at the time, then return to analyse them in light of the consequences?
• What would it take to introduce Radical Transparency in your organisation?
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