Ray Dalio is the founder, co-chairman, and co-chief investment officer of Bridgewater Associates, the largest hedge fund in the world. He grew up in a middle-class neighborhood in Long Island and began playing the stock market at age 12. He started Bridgewater out of his apartment in New York in 1975 and enjoyed some success before some erroneous market predictions caused him to lose everything in 1982.
The experience taught him not to be overconfident, to gain a more complete view of economic history, and to find ways to balance low risk with high returns. This ultimately led him to develop a set of principles for living life and reaching goals, which he credits for his success. He wrote Principles so that others could benefit from what he’s learned.
(Shortform note: Like Dalio, other successful people first experienced failure, which has led to the myth that successful people need to fail before finding success. While this makes for a good story, research says that these types of comebacks play a role in just a small percentage of success stories, and most entrepreneurs who fail once will most probably fail again. That’s because they don’t properly identify the real cause of their failure and may blame outside factors instead of their own actions. Dalio’s principles can help you examine the truth of your failure and guide you in building the knowledge and experience you need to find success on your next attempt.)
Every day, you face new situations that require your response. If you had to decide what to do at each point in time, you’d react impulsively or spend so much time and energy weighing your options that you’d be exhausted. However, Dalio believes that every situation has happened before, so you can systematize decision-making and make it more objective and efficient. This is why you need principles–what Dalio describes as fundamental truths that determine how you behave. They help you figure out how to automatically and appropriately respond to any situation you’re facing.
(Shortform note: Dalio contradicts his ideas surrounding principles throughout the book. On the one hand, he says that you should choose the principles that work best for you; on the other, he says that you must use all of his principles in order to be successful. Given that other people—like PayPal co-founder Peter Thiel and former Intel CEO Andrew Grove—have found success using their own formulas, it’s safe to assume that Dalio’s wholesale principles aren’t the only key to success.)
As a result of his early mistakes, Dalio learned that he made the best decisions when he put his ego aside and relentlessly sought the truth. Many of his principles are about understanding the importance of finding the truth and how to achieve it over common obstacles. Here, we’ll explore his eight main principles and how you can put them into practice. Then, we’ll explore how Dalio synthesizes these principles into a powerful process for working toward and achieving goals.
When you’re struggling, Dalio says you shouldn’t fall into the trap of wishing things were different. This will bias your objectivity and get you nowhere. Instead, embrace your reality and be completely open to the possibility that you’re wrong. Dalio notes that there are two hurdles that will likely get in the way of recognizing reality:
Your ego is your underlying desire to be capable, to be seen by other people as capable, to be loved, to feel important, and to be praised by others. Experiences that threaten that ego—those that make you feel irrelevant or that point out your weaknesses—are painful. To avoid this pain, you might shut yourself off from self-reflection or deny reality. This leads to spontaneous, emotionally driven reactions, rather than well-thought-out decisions.
(Shortform note: Allowing your ego to take over can harm you in more ways than the one Dalio describes. In Ego Is the Enemy, author Ryan Holiday mentions three ways that ego can keep you from being successful: First, it can lead you to brag and self-promote instead of taking action. Second, it can make you feel like you know everything, which prevents you from growing. And third, it can make it especially difficult for you to recover from failure.)
Dalio suggests a formula that helps him prevent his ego from taking over: Pain + Reflection = Progress. He uses this equation to illustrate that you should take full responsibility for your mistakes and relish the chance to get better, rather than being ashamed.
(Shortform note: Jack Canfield’s formula for improving outcomes in The Success Principles—Event + Response = Outcome—is a slightly different take on this thought process that centers on an event itself and your response to it rather than a reflection on the pain of an event. However, like Dalio, his formula centers on accepting your role in your situation.)
Your blind spots materialize when you see the world through your own biased lenses. You can’t appreciate what you can’t see, thus two people who see the world differently often end up arguing over who’s right.
(Shortform note: Leaders are especially prone to having blind spots. In Creativity, Inc., Pixar co-founder Ed Catmull says this is due to three factors: First, employees want to look competent in front of their bosses, so they aren’t honest about issues. Second, a middle manager might make it challenging to report any mistreatment. And third, the size of some organizations makes it difficult to get all perspectives.)
Dalio says that you can get over these two hurdles by being totally receptive (or what he calls being “radically open-minded”), which we’ll discuss next.
Being totally receptive means accepting that you might be wrong and relentlessly seeking out ways to increase your chances of being right. Dalio says you can do this in three ways::
1) Looking for the best possible answer. Accept the possibility that others might see something better than you and point out threats and opportunities you don’t see. You’re looking for the best answer that exists, not the best answer that you can come up with yourself.
(Shortform note: Psychologist and author Jordan Peterson has a similar view. In 12 Rules for Life, he writes that you should go into a conversation genuinely believing that you have something to learn from the other person. Otherwise, you’ll end up trying to convince each other of your respective positions and find it difficult to have a fulfilling conversation.)
2) Recognizing that you’re blind. Even if you believe that your baseline probability of being right is already high, it’s always valuable to raise that probability by being open-minded to other viewpoints.
(Shortform note: As a leader, you can manage your blind spots by making sure you’re getting full and accurate information from your employees, encouraging people to be more vocal about issues, and getting closer to the issues by speaking with those directly involved.)
3) Balancing humility with an awareness of what you know and how you reason. One without the other is suboptimal: If you’re very open-minded but weak when it comes to reasoning, you’ll have problems picking the right people and ideas. If you have good reasoning but aren’t humble, you miss out on better ideas. If you know little yet you’re convinced you know everything, you’ll remain stagnant.
(Shortform note: This is similar to the Dunning-Kruger effect, a cognitive bias where people who are bad at something are incapable of recognizing how bad they are. In an interview, psychologist David Dunning explained that you can become more aware of your cognitive blind spots by thinking about what you don’t know and exposing yourself to people with different perspectives.)
To Dalio, making the best decision means having total receptivity alongside extreme honesty and transparency—when you know that other people are open-minded and you don’t have to worry about hurting their feelings, you can be more truthful about issues. At Bridgewater, Dalio created a culture that refuses to compromise the objective truth to skirt around people’s egos and emotions.
Dalio says extreme honesty means not putting a filter on your thoughts. Instead, you reveal them, question relentlessly, and surface issues immediately instead of hiding them. At Bridgewater, this means that everyone has not only the privilege but the obligation to speak up publicly, and to call people out when they do something foolish—even Dalio. (Shortform note: Apple’s Steve Jobs had a similar approach, insisting that people should be able to give fearless feedback. Apple even gave out an award to those who stood up to Jobs.)
Extreme transparency means letting everyone see everything. Dalio says that everyone in an organization should get access to the full truthful information, rather than having it filtered through other people first. In turn, people with more complete information can make better decisions, and the organization draws on the full power of its people.
(Shortform note: Extreme honesty and transparency can build trust within a team, help people grow, and increase efficiency. Dalio’s version seeks to remove emotions from the equation, but the book Radical Candor has a different approach. Author Kim Scott writes that the two crucial components of radical candor are: caring personally, or seeing employees not just as workers but as people with a life outside of work, and challenging directly, or giving criticism in private to help improve performance. Scott writes that public criticism (which is the norm at Bridgewater) triggers defensiveness and anxiety within a team.)
The previous three principles set you up for productive conflict (what Dalio calls “thoughtful disagreement”) and fostering an environment where the best ideas win, no matter the source (what Dalio calls an “idea meritocracy”). These two vital practices ensure you make the best decisions in an environment where opposing ideas are freely shared.
Productive conflict means being open to other viewpoints and moving a conversation in a useful direction. Dalio emphasizes that your goal is not to prove that you’re right, but rather to find out which view is right and decide what to do about it. This requires you to be open-minded and assertive at the same time: Make an effort to see things through the other person’s eyes, while clearly communicating how you see things. Discuss respectfully and dispassionately, and bring in a third person to moderate if you can’t agree.
(Shortform note: When you’re assertive without being open-minded during conflict, you have what’s referred to as a “combative mindset,” which, of course, won’t lead to productive conflict. In The Anatomy of Peace, the Arbinger Institute says that this mindset may come from a feeling of superiority, inferiority, or entitlement, or a desire to be seen in a positive light. Overcome your combative mindset by being aware of your triggers and reactions, then recalling situations where you reacted positively. This can help you shift your perspective and see the conflict through a different, more productive lens.)
Aside from practicing productive conflict, Dalio says it’s important to give more weight to the opinions of people who are more credible in an area, in a process of credibility-centered decision making (what he calls “believability-weighted decision making”). This is distinctly different from weighing everyone’s votes equally, as in a democracy.
Together, productive conflict and credibility-centered decision making lead to an environment where the best ideas win, which turns out better solutions and decisions than just one person coming up with ideas or issuing orders.
(Shortform note: If you plan to implement credibility-centered decision making, it’s important to create an environment where people feel comfortable going against the consensus. In Originals, Adam Grant says you can surface dissenting ideas by gathering people who have diverse viewpoints and a reputation for speaking up. You can also ask employees to name other people who aren’t vocal enough about their ideas.)
In addition to the previous principles, Dalio believes that viewing complex systems as machines can help you make better decisions. This means looking at everything as cause-and-effect relationships and drawing out predictable patterns. Seeing the same situations happen again and again over time can then help you determine corresponding repeatable courses of action.
Dalio applies this thinking on three levels:
See yourself as a machine that takes in inputs and produces outputs. Your goal is to design a machine that produces better outcomes, or, in other words, to design your life in such a way that you can achieve your goals. This means seeking out your problems or weaknesses and fixing them, as you would with a faulty machine.
(Shortform note: Dalio’s suggestion here may seem unusual, as it goes against a common piece of career advice: Ignore your weakness and focus on your strengths. However, overplaying your strengths also has two downsides: First, your strengths can turn into weaknesses. For example, if being vocal is your strength, you might overdo it and become overbearing. Second, when you focus too much on a specific skill set, you can become a lopsided leader with limited capabilities. Reflect and ask others to help you determine if you’re overdoing your strengths, then recalibrate if necessary.)
Dalio learned to see the market as a network of cause-and-effect relationships, which enabled him to figure out repeatable trading rules and quickly find solutions.
(Shortform note: Dalio believes that every event has happened before, so it’s possible to determine cause-and-effect relationships and predict outcomes within the economic machine. However, former options trader Nassim Nicholas Taleb argues that every system has “black swans”—events that are by their very nature unpredictable and thus cannot be accounted for by any machine. In The Black Swan, he writes that one reason “experts” often get predictions wrong is because they base their predictions on the past, which in itself has many unknowable factors.)
Visualizing your organization as a machine means coming up with the most efficient structure and giving everyone a clear visual of their roles and responsibilities. Dalio believes that people are a key component of the machine: He sees managers as engineers who are in charge of building, maintaining, and improving this machine, and believes you should design the best team with people of complementing strengths.
(Shortform note: In the same way that you need to scan your “individual” machine for weaknesses to be addressed, you also need to understand and address the weaknesses of your bigger machine—your team. Watch out for the five dysfunctions of a team that typically prevent them from succeeding: an absence of trust, a fear of conflict, a lack of commitment, avoiding accountability, and inattention to results. You can read more about these team weaknesses in our full guide to The Five Dysfunctions of a Team.)
To Dalio, people are one of the most important components of the organizational machine, but they can also be tricky to manage because everyone thinks and behaves differently. To avoid misunderstandings and be productive, Dalio thus says you have to be curious—you should want to understand why people see things in a certain way—and understand everyone’s strengths and weaknesses, including your own. Knowing this information can help you build a team of people with complementary strengths. To this end, Bridgewater uses personality assessments to build a clear picture of each team member.
(Shortform note: Bridgewater is one of many companies that make use of the Myers-Briggs Type Indicator to assess personality types and create complementary teams. However, experts have disregarded this test because it was developed by people who had no formal training in psychology, based on untested theories, produces inconsistent results, and relies solely on binary outcomes.)
Dalio shares specific principles for hiring, training, and evaluating people to ensure that they’re a good match:
According to Dalio, you should hire people who have both great character and great capabilities. To find these rare and valuable hires, he recommends that you:
Determine your needs. Create a mental image of the values, abilities, and skills required for each person in the role to do their job. (Shortform note: Dalio leaves out one factor that some consider to be the most important: attitude. Some experts believe that you should even hire for attitude and then train for skill, because someone with a good attitude has a greater chance for success.)
Systematize the interview process. In keeping with his theme of visualizing everything as a machine, Dalio believes that systematizing the interview process leads to more consistent, objective evaluations. You can do this by coming up with a set list of questions and including how different answers differentiate candidates of different qualities. Save candidates’ answers and compare them against successful candidates’ performance data later on so you can tell how predictive questions are of behaviors. (Shortform note: Ask out-of-the-box questions to get candidates to veer away from rehearsed answers and get them to reveal their real personality and thought process.)
Pay north of fair. People perform better when they don’t have to worry about money. Dalio says you should pay them enough to meet their needs, but not too much that they become complacent. Start with a baseline compensation based on the market rate and build in incentives based on performance metrics. (Shortform note: Some say that an incentive system isn’t the best way to go. In Drive, author Daniel H. Pink argues that rewards can actually increase bad behavior because it promotes cheating, creates addiction, and encourages short-term thinking. However, Pink ignores the vast literature on the benefits of incentives.)
The training process can tell you if the person you hired is a good fit. To accurately gauge their strengths and weaknesses, Dalio has the following guidelines:
Be clear about expectations. That way, you can hold people accountable and determine whether they performed poorly due to unclear expectations or unmet expectations. (Shortform note: If you’re chronically unhappy with your team’s performance and believe that they don’t meet your expectations, evaluate whether your expectations are unreasonable. While you should hold people to a high standard, you shouldn’t hold out for perfection.)
Give regular feedback. Delivering feedback throughout the training period and beyond allows a person to recalibrate if they’re missing the mark. Remember to practice extreme honesty—letting them know their areas for improvement allows them to reflect and adjust so that they can meet their goals. (Shortform note: When assessing performance, avoid giving vague, generalized feedback and instead give more specific comments so the recipient knows exactly what’s working and what’s not. For example, instead of saying, “Your presentations need work,” you should say, “You can improve your presentations by shortening the bullet points and adding year-on-year graphs.”)
Be fair. Hold all employees to the same standards. Don’t be limited by your view—triangulate your findings with other people. (Shortform note: Half of executives in a survey don’t believe in the efficacy of evaluation systems because they perceive a lack of fairness. You can increase fairness by being clear about how employees’ work fits into the organization’s priorities, coaching employees through meaningful discussions, and saving big rewards for the top 20% of workers who typically contribute 80% of the value.)
Check behavior, and deter bad behavior. Audit or investigate people, and explain why you’re doing it. If you find a rule violation, use what Dalio calls a “public hanging” to deter future bad behavior. (Shortform note: The current trend of remote and hybrid work setups makes it harder to keep an eye on employees’ behavior. There are tools to monitor employees working out of office, but close surveillance may erode trust and increase stress. If you must monitor remote workers, discuss appropriate metrics with workers, track only what’s necessary, and be honest about what you’re monitoring and why.)
Decide how to move forward. If someone isn’t performing well, determine if they would be a better fit elsewhere in the organization. Understand why they failed, and make sure this won’t happen again. If it’s due to a lack of values or abilities, it’s best to let them go. Deciding to keep them is not only toxic to the organization but also holds them back from their personal evolution. (Shortform note: If you’re considering an internal transfer for an underperforming employee, be sure they have the right skills—otherwise, they just become someone else’s problem. If you find that the cause of the failure can’t be rehabilitated and that you’ll have to let someone go, take swift action. Dragging it out sends a signal to your team that you can’t make tough decisions.)
Carefully selecting team members who complement each other doesn’t mean there won’t be any challenges. Everyone has different personalities, perspectives, and styles of working, so it’s only natural to have misunderstandings and disagreements. Dalio gives the following tips to help team members stay aligned (or, as he says, “stay in sync”) and make decisions more efficiently:
Resolve the most important disagreements. People can disagree on many things, and trying to resolve each issue requires a lot of time and effort. Dalio advises making a list of disagreements, going down the list, and prioritizing the most important issues. (Shortform note: A disagreement is worth your time and attention if the dissenting opinion is specific, objective (rather than a personal attack), and focused on the future—it’s concerned about outcomes rather than something that happened in the past. Otherwise, it’s likely just an empty complaint.)
Manage meetings. Meetings can take up a lot of time, so Dalio says you should have standardized meeting agendas, clarify who’s leading it and what the topic is, and limit participation to whom you value most for your objectives. (Shortform note: Sometimes an email can be enough, but go for an in-person meeting when emotions are running high, when your objective is to solve a problem, or when the topic is complex.)
Cultivate meaningful relationships. Dalio believes that team-building means treating people like partners or extended family because this makes relationships more special than quid quo pro employment agreements. However, Dalio notes that you should still let go of “family members” if they don’t perform excellently. (Shortform note: Some experts disagree with Dalio, arguing that treating employees like family can backfire. Firing “family” seems hypocritical, and an organization requires good leadership, not parenting. Instead, they say, it might be better to view your organization as a sports team, where there are clear goals, roles, and expectations.)
When you operate by the previous principles, you can consistently arrive at the best decisions. While each situation has unique particularities, Dalio writes that there are only two main steps to making a decision:
Making decisions without the proper context leads to poor outcomes. Thus, you should get as much information as you can from credible sources. This information should give you an overview of your situation and how you got there. You can then compare it against your desired trajectory to see if you’re progressing at an acceptable pace. You should also take a look at all the information and see how they’re interconnected by a greater logic.
(Shortform note: Keep in mind that decision-making is a circular process: As you obtain new information, you have to circle back and compare it against the information you already have, and analyze this old information through a new lens. For example, when deciding on a university, you don’t just look at one school and make a decision. You explore various universities to adequately compare them and find the best fit based on your objectives, capabilities, and resources.)
To make a good decision, Dalio says you should:
Systematize decision-making. Dalio believes that emotions hurt good decision-making, so it’s best to automate decisions as much as you can. This means using the same timeless and universal principles to decide on situations that fall within the same category. Ideally, you can convert your principles into algorithms and have a computer decide alongside you. (Shortform note: If it’s unclear what algorithms are, think of an “if-then” statement. For example, “If I receive enough money to pay my bills, I will save 20% of what remains in my retirement account. If I don’t, I will pay my highest interest bills first, then try to cut down my spending.” Having clear rules like this gives you an easy way to make decisions without thinking hard, from scratch, each time.)
Never take the first available option. Sometimes it appears you only have a choice between two difficult options, or they each trade off something that is non-negotiable. But Dalio says you don’t have to settle for either option—instead look for a novel solution. For example, Dalio created a fund that has high returns and low risk. (Shortform note: This is similar to the approach of some successful companies: They’re not limited by or—they don’t believe in scenarios where they must choose between seemingly contradictory choices A or B. Instead, they employ the power of and, figuring out a way to have both A and B.)
Weigh second- and third-order consequences. Every action has a direct “first-order” consequence, as well as longer-term second- and third-order consequences. Think of consequences as a series of dominoes, one triggering the other. Don’t let unpleasant, short-term first-order consequences deter you from reaching your real goals. (Shortform note: You may ignore second-order consequences because you think they’re too unpredictable and too complicated. But using second-order thinking can keep you from making disastrous decisions. To simplify the process of second-order thinking, ask yourself the following: What are the different probable outcomes? Which one is the most likely? What are the chances I’m right? What do others think? How does my thinking differ from theirs?)
Make expected value calculations. By this, Dalio means assessing all your options to determine which gives you the highest expected value. Don’t shy away from an option just because there’s something wrong with it, and instead consider the potential gains. The important thing is to figure out your probability of being right, and know that the risks aren’t big enough to knock you out of the game. (Shortform note: Other successful companies employ a tactic similar to Dalio’s, which author Jim Collins calls a “bullets-before-cannonballs” approach. In Great by Choice, he writes that successful companies fire “bullets,” or launch small-scale projects as an experiment, before concentrating their firepower into “cannonballs,” or bigger-scale projects based on the results of their smaller experiments.)
Get past disagreements. Make sure you don’t leave important conflicts unresolved, and know when to stop debating and move on. (Shortform note: If you have a perfectionist on your team who can’t let things go, help them become more self-aware and understand how obsessing over small details can stymie both team and personal progress.)
Make the decision. Put it to a vote, then compare the democratic, equally-weighted result with the credibility-centered vote. If the two don’t align, then you should generally go with the credibility-centered vote. (Shortform note: Getting more people to weigh in can lead to greater insight, but it also has two downsides: first, collaborative overload, which leaves little time for individual work; and second, uneven work distribution. To avoid these pitfalls, companies should recognize when collaboration is necessary, redistribute work to help ease the load of overburdened employees, and incentivize effective collaboration.)
Many of the ideas that Dalio discusses form the foundation for his process for achieving success in any context. This involves five steps:
Having a goal will keep you focused and give you a clear direction. If you don’t have a goal, you’ll likely wander aimlessly and never get anywhere.
Dalio says your ultimate goal shouldn’t be money because beyond giving you the basics, it doesn’t significantly improve your life. Instead, he recommends that you first think about your real non-monetary goals, then work your way backwards to specific monetary goals that will help you get there. (Shortform note: You can also do this clarifying practice the other way around: First, make a list of what you would buy if you won the lottery. Once you run out of things to write, your mind will be clear enough to discover the things that really matter to you.)
He adds that you should stay focused on a few goals because chasing too many at once spreads your attention and keeps you from achieving any of them. (Shortform note: Staying focused on just a few audacious goals can help ensure long-term success. In Built to Last, Jim Collins and Jerry Porras write that one key behind the longevity of enduring companies is that they refuse to be complacent and commit to bold, risky goals that have a 50 to 70% chance of success.)
Problems are the challenges that get in the way of reaching your goals. Dalio says that to recognize your problems, you need to overcome your ego, examine yourself unflinchingly, and understand your weaknesses objectively.
To fix the problems you find, you must be totally receptive and stay accountable for your failures. You also have to be precise when it comes to describing your issues so that you can then design relevant solutions.
(Shortform note: Too often, people skip this and the next step and jump straight to solutions. If you’re a manager, you may be promoting this tendency by echoing the common refrain, “Don’t bring me problems, bring me solutions.” This directive might lead to half-baked solutions from people who lack understanding of the real problem. In Originals, Adam Grant says that you should instead encourage employees to identify the issues even if they haven’t figured out the solutions yet.)
Often, problems can unfold as a chain reaction, and the problem you’re looking at is just a syndrome of the primary source (what Dalio calls the “root cause”). Using a medical analogy, your problems are symptoms, and the primary source is the disease. To stop your symptoms, you need to cure the disease. Likewise, to be able to truly solve your problems, you must identify the primary source.
Get a Clearer Picture of the Problem
Many people rush to solve a problem because it gives them a sense of comfort and accomplishment. However, addressing the symptom of a problem rather than the source can make things worse. Keep the following guidelines in mind to uncover the fundamental cause of the issue:
Look at the facts, not just the data. Look beyond spreadsheets and instead gather facts through observation. A report can tell you how often a team member misses deadlines, but it doesn’t show that the team member is working with an archaic laptop that constantly breaks down.
Reframe your problem statements. You should clearly and precisely describe what the problem is. This leads to more detailed questions that lead to better solutions.
Work your way backward. Use a fishbone diagram: Start with the problem, then branch out into factors that can help you identify underlying issues creating the problem.
To find the primary source of a problem, keep asking, “Why didn’t things go as they should have?” repeatedly. This allows you to get past the first answer to a problem until you arrive at the primary source. (Shortform note: This method is known as the “five whys.” In practice, you might need to ask “why” more or less than five times, depending on how many layers of issues you find.)
Remember that diagnosing a problem should lead to improvements and positive outcomes. Otherwise, it’s just a waste of time. Dalio says that once you diagnose a problem, you should come up with a detailed plan which includes specific tasks and timelines, as well as the second- and third-order consequences of your plan.
How to Effectively Communicate a New Plan
Once you have a new plan, share it with those involved. However, keep in mind that communicating your plan doesn’t automatically mean that people will buy into it. Here’s how you can effectively communicate a new strategy and, more importantly, get your team on board:
Keep it simple, but connect it to your purpose. The plan should be easy to understand and inspiring, while reminding your employees of how it’s related to your organization’s bigger goal.
Make a communication framework based on three pillars: Inspire—your message should be memorable and exciting; educate—break out into small groups and have dialogues about people’s roles in the new strategy; and reinforce—repeat the strategy through various channels.
Assign ambassadors to deliver important messages. Employees will be more receptive to their peers than to the company CEO.
Once you have your plan, you need to execute it. Dalio suggests three tactics: Have good work habits, measure your progress, and stay motivated. This may include actions such as making use of checklists to stay on track, pushing through failure, and celebrating when you solve problems and reach your goals.
The Work Doesn’t Stop
Celebrating success doesn’t mean that you can be complacent. In Think Like a Rocket Scientist, author Ozan Varol writes that success isn’t final—you’re only as good as your last win, so you should strive to keep growing. He writes that you can learn these lessons from success to help you avoid becoming complacent:
Reflect on “near misses.” Think about the instances when things could have gone either way. This can help you prepare for similar situations in the future.
Objectively analyze every decision. Success can make you feel invincible, but always assume that things can go wrong. With every decision, use a premortem analysis to run through possible outcomes and how you can safeguard yourself against potential issues. Then, after you’ve made the decision, use a postmortem analysis to determine which outcomes were due to skill or due to pure luck.
In his book Principles: Life and Work, billionaire Ray Dalio discusses the experiences, lessons, and practices that shaped the guiding principles powering his success.
His book is a guide to rational thinking. The main theme is that finding truth is the best way to make decisions, and that ego and emotion prevent you from discovering the truth. Dalio shares his major strategies to circumvent these weaknesses.
Ray Dalio is the founder, co-chairman, and co-chief investment officer of Bridgewater Associates, the largest hedge fund in the world. He grew up in a middle-class neighborhood in Long Island and began playing the stock market at age 12. He started Bridgewater out of his apartment in New York in 1975 and enjoyed some success before he made some erroneous market predictions that caused him to lose everything in 1982.
This experience of failure taught Dailo not to be overconfident, to gain a more complete view of economic history, and to find ways to balance low risk with high returns. The experience also ultimately led him to develop some unconventional investment and management strategies that led to Bridgewater’s success. We’ll discuss these strategies in more detail later in the guide.
A self-described “hyperrealist,” Dalio relies on his experiences, exhaustive research, and his extensive knowledge of past economic events to help him recognize patterns, make predictions, and formulate strategies that have paid off. As of June 2021, Bridgewater manages around $150 billion while Dalio has a net worth of $20.3 billion and ranks #88 on the Forbes list of billionaires. Some have called him the “Steve Jobs of investing” for his innovative approach to finance, popularizing industry-changing strategies like risk parity and portable alpha. In 2012, he was featured in TIME Magazine’s list of the 100 Most Influential People. He was also part of the Bloomberg Markets list of 50 most influential people.
Principles: Life and Work, published by Simon and Schuster in 2017, is a collection of principles that Dalio gathered over the course of his career. A strong believer in systems and automation, Dalio wrote down solutions to problems and scenarios that cropped up again and again, and eventually collated them into a hundred-page text that became required reading for Bridgewater’s employees.
In the introduction to Principles, Dalio writes that he planned to share his principles in two installments: The first book would contain life and work principles, while the second (Principles of Navigating Debt Crises, released in 2018) would be about economic and investment principles.
Dalio believes that the same thing has always happened and will continue to happen throughout history: a cycle where there are periods of prosperity and everything works in harmony and periods of severe imbalances in power and wealth that lead to unrest and, eventually, a change in the world order. Recognizing the cause-and-effect relationships of economic events through the decades, Dalio gained a unique perspective that enabled him to find ways to weather virtually any kind of storm.
In 2007, Dalio saw signs that the U.S. financial system was heading for collapse, and he sent out a memo to clients and policymakers to warn them of the impending recession. He closely studied the Great Depression and other similar periods then based Bridgewater’s strategy (long safe assets like sovereign bonds and gold, together with short risky assets) on his findings. The tactic worked—when the recession hit in 2008, Dalio writes that their flagship fund earned 14%, while the market as a whole lost over 30%. (Reports say that other hedge funds averaged a 19% loss.)
After emerging from the 2008 to 2009 financial crisis unscathed, Dalio found himself in the spotlight. Many saw him as some sort of financial clairvoyant, but he attributed his success to the Bridgwater culture. He thus decided to share his principles online in 2010. This free precursor to the book was downloaded over three million times.
Principles falls under the broad category of books by well-known business people about the strategies behind their success. Similar books in the genre, which we’ll draw from throughout this guide, include:
Reviewers have also described Principles as a “modern-day Meditations,” comparing it to the classic text on Stoicism by Marcus Aurelius. Like Dalio, the Roman emperor stressed the importance of logic over emotion.
Principles landed at #1 on the New York Times Best Seller list and was also the #1 Amazon Business Book of the Year. It’s sold over two million copies and has been printed in 34 languages.
After publishing Principles, Dalio released three other books: Principles for Navigating Big Debt Crises, Principles for Success—a condensed, illustrated version of Principles: Life and Work that was marketed for readers six to 60 years old and beyond—and The Changing World Order: Why Nations Succeed and Fail.
In 2019, Dalio launched a free application called Principles in Action. The app contains the full text for Principles: Life and Work as well as features like interactive videos, case studies, and a digital “coach” that helps you find solutions to life and work problems.
Positive reviews say that Principles is well-organized and insightful, giving readers a clear picture of how Dalio made his billions. The New York Times describes the book as “instructive and surprisingly moving.”
Critical reviews say that there is no scientific basis behind Dalio’s principles and that he relies on pseudo-science. For instance, he differentiates between left-brained and right-brained thinking, a myth that has been debunked by research.
Neither is there any proof that the principles are directly responsible for Bridgewater’s investment success. In fact, The Wall Street Journal argues that Bridgewater might even be more successful if the firm didn’t adhere to the principles, which the publication describes as “dangerously reductive” (seeking to turn people into emotionless automatons) and contradictory. For example, Dalio stresses the importance of evidence-based decision-making, while also using the Myers-Briggs Indicator Type, a dubious personality test that has no sound basis on psychology. Another New York Times review also highlights the contradictions at the firm—while Dalio preaches “radical transparency,” Bridgewater keeps some things shrouded in secrecy.
In a lengthy review, Current Affairs opines that Dalio is an example of a successful man mistaking wealth for wisdom and that his principles are actually problematic. The review criticizes Dalio’s “silly” visualizations, his “inhuman” view that emotions are a kind of weakness that you need to eliminate, and his license to suspend the principles (what he calls enacting “martial law”) as he sees fit.
The book is divided into three parts:
Dalio mentions some themes repeatedly, such as total receptivity, overcoming your ego, and the five-step process for getting what you want.
In our guide, we’ve reworked Part 1 to highlight the key themes in Dalio’s life and included specific examples from his biography that illustrate these themes. We’ve also synthesized Parts 2 and 3, leading with Dalio’s life principles and addressing specific work situations under foundational principles like open-mindedness, transparency, and productive conflict. We then end with his process for setting and achieving goals, of which his principles are a necessary component.
As reviewers mentioned, Dalio doesn’t offer any scientific basis for his principles; instead, he relies on his own success as proof of their validity. We’ve thus added commentary to expand on his ideas, citing research to support or offer counter-arguments to his principles.
Ray Dalio is the billionaire founder of Bridgewater Associates, one of the world’s largest hedge funds. He wrote Principles to pass on his principles for living life and reaching goals, and help other people become successful.
According to Dalio, principles are the fundamental truths that determine how you behave. They reflect your inner character and individual values. People who align in principles get along with each other, while people who don’t have constant conflicts and misunderstandings.
Dalio outlines three reasons why having principles is important:
1) They let people know what you stand for. When you operate by clear principles, people know what behaviors to expect from you. In contrast, not having clear principles will lead you to behave inconsistently, causing you to lose people’s trust.
(Shortform note: You don’t need grand gestures to convey your principles and build trust. In Dare to Lead, Brené Brown writes that your small, consistent, everyday acts send a strong message about what you stand for and build a sense of trust naturally over time.)
2) They help you deal with the complexity of life. Every day, you face new situations that require your response. If you had to consciously decide what to do in each situation, you’d either react impulsively or become exhausted from the constant battle between your thoughts and your feelings. Dalio explains that having fundamental principles helps you quickly—almost automatically—determine the best response to the situation you’re facing.
(Shortform note: Having automatic responses means you already know what to do and don’t have to expend energy deliberating on your course of action. In Switch, authors Chip and Dan Heath explain that you can train yourself into autopilot behaviors by setting up triggers to prompt specific actions.)
3) They set you up for success. Dalio says that operating by clear principles that are aligned with your goals and your nature allows you to make the best decisions. These decisions collectively determine the quality of your life.
(Shortform note: Dalio contradicts his ideas surrounding principles throughout the book. On the one hand, he says that you should choose the principles that work best for you; on the other, he says that you must use all of his principles in order to be successful. Given that other people—like PayPal co-founder Peter Thiel and former Intel CEO Andrew Grove—have found success using their own formulas, it’s safe to assume that Dalio’s wholesale principles aren’t the only key to success.)
Two Different Views on Principles
Dalio’s definition implies that principles are subjective, meaning that different people believe in and operate by different truths. But author Stephen Covey has a different definition of principles: In The 7 Habits of Highly Effective People, he says that principles are universally recognized, self-evident, and enduring truths, and that the idea of following in opposition to them seems ridiculous. He explains that principles are different from practices—actions that you apply to particular situations—and values—subjective beliefs or ideas.
Dalio refined his principles in an iterative loop—that is, he set goals, made mistakes, reflected and learned new principles, then set bigger goals. Over time, he collected a set of principles that he believes addresses virtually any life or work situation.
Dalio’s principles center around success as he defines it—being an independent thinker, a successful financial trader, and working with a team that thinks like him. The principles also align with his personality and nature—someone who doesn’t like following other people’s instructions and instead prefers to figure out things himself. He’s adamant that each person needs to discover their own principles, depending on their goals and personality. Dalio thus emphasizes that you shouldn’t take his principles on faith. Instead, you should question his ideas, see if they make sense to you, then walk away with the principles that fit your goals best.
(Shortform note: Jim Collins agrees that principles aren’t one-size-fits-all, whether it’s on a personal level or organizational level. In Built to Last, he writes that successful companies may have some guiding principles in common, but there isn’t one set of principles for all of them. What matters when it comes to achieving success isn’t so much what each company’s principles are, but how strongly and consistently an organization—or an individual—adheres to them. Like Dalio, Collins writes that these principles should be authentic: a reflection of what you believe in and not what you think you should believe in.)
To help readers understand how he developed his principles, Dalio shares the story of founding his hedge fund Bridgewater Associates, including his mistakes and realizations. In Part 1 of this guide, we expand on the foundations and key themes of his principles and include relevant references to his biography.
Dalio was born in 1949, the only son of a jazz musician father and a stay-at-home mom. He demonstrated an independent streak early on—he didn’t like school because he disliked rote memorization and following instructions. However, he was single-minded when it came to his interests. He started investing in stocks at age 12, got lucky and tripled his money during a bull market, and from then on, he was hooked on the stock market. He read annual reports from public companies and kept buying more stocks.
(Shortform note: There are some similarities between Dalio’s childhood and that of Microsoft founder Bill Gates. Gates was also bored in school at times, but he was highly engaged when it came to his interests. While Dalio studied and invested in the stock market beginning at age 12, Gates was fascinated by computers and spent much of his early life in the computer lab. Dalio’s and Gates’s passionate interests would help shape their lives later on.)
College better suited Dalio’s independent nature as it gave him the freedom to choose his subjects. In 1971, he graduated from C.W. Post with a degree in finance and, with his near-perfect grades, he was able to get into Harvard Business School.
While at Harvard, Dalio took an interest in commodities. After graduating with his MBA, he worked as a commodities trader in a brokerage firm while also trading his own account. He was eventually fired from the firm for being too wild (he shares that he once punched his boss in the face) and founded Bridgewater Associates in 1975. Bridgewater began by advising customers on how to handle market risks and later started buying and selling on his clients’ behalf, earning a percentage of the profits.
(Shortform note: Dalio has a nonconformist side that has gotten him fired, but it has also served him well—research suggests that rebels can make good leaders. Lean into a rebel leadership style by going beyond routine and seeking our fresh strategies, encouraging other people to disagree with you, and taking on unexpected roles.)
Dalio’s independent thinking led him to bet against the consensus view. The late 1970s were a volatile time, economically speaking, and Dalio was confident that all signs pointed to a looming depression. He told his clients this and adjusted Bridgewater’s investments based on his prediction. At first, it looked like he was completely right. But due to the Fed’s interventions, the market rebounded, and Dalio ended up being completely wrong. He lost nearly everything—he had to let go of his entire staff and even had to borrow money from his dad to stay afloat.
(Shortform note: Like Dalio, other successful people first experienced failure, which has led to the myth that successful people need to fail before finding success. While this makes for a good story, research says that these types of comebacks play a role in just a small percentage of success stories, and most entrepreneurs who fail once will most probably fail again. That’s because they don’t properly identify the real cause of their failure and may blame outside factors instead of their own actions. Dalio’s principles can help you examine the truth of your failure and guide you in building the knowledge and experience you need to find success on your next attempt.)
In retrospect, Dalio thinks that failure was one of the best things to happen to him because it revealed four errors that taught him important lessons:
He realized that emotions led him to overreact in the short term, which led to rash decisions. He thus learned to focus more on facts than on feelings.
(Shortform note: Dalio believes that emotions muddle decision-making, ultimately leading to failure. However, some argue that emotions can be helpful in certain situations. For instance, in Never Split the Difference, Chris Voss argues that negotiation requires displaying empathy toward the other party to make them feel safe enough to let their defenses down.)
He was so sure that he was right in his economic predictions, but his failure led to a healthy fear of being wrong. This led to a shift in his perspective: Instead of stating, “I know I’m right,” he started asking, “How do I know I’m right? What am I missing?”
Carefully examining his knowledge and decision-making process in this way prompted him to be relentlessly curious about why other smart people disagreed with him. He learned to get a broad range of inputs from other people, carefully considering the credibility of each source before making a decision.
Four Other Questions to Ask for Better Decision-Making
Dalio’s questions—“How do I know I’m right?” and “What am I missing?”—lead to greater insights and, ultimately, better decisions. Beyond Dalio’s suggestions, there are four other research-backed questions you can ask when faced with a complex or important decision:
What are the facts? If you’re making decisions as a team, this question can reveal if you’re all working with the same information and prevent misunderstandings.
What are the steps to make this succeed and to address possible challenges? It’s important to map out how to make something work, what the risks are, and how to address those risks.
What kind of effect will this decision have a year from now? Envisioning what success or failure will look like in the long run can give you a clearer idea of the decision’s consequences and help you determine the amount of effort you need to devote to making the decision.
How does this affect others? Consider the impact—both positive and negative—on the community. Ethical decision-making builds trust, demonstrates respect, and gives you a sense of fulfillment.
Had Dalio studied other aspects of economic history beyond what had happened in his lifetime, he would have seen that a recession wasn’t a certainty. He vowed to study the movements of major economies and markets over centuries and to assemble a set of principles that were timeless and universal.
(Shortform note: There are various economic theories that help predict future events. Mathematical modeling, for example, is very thorough, but it might not consider relevant nonmathematical insights. Thus, some believe that Dalio’s method of looking at historical data is still the most unbiased, realistic way to make assumptions about the future.)
Dalio thought he could either pursue high returns and high risk, or lower risk and lower returns. He learned to look beyond the obvious, conventional choices and found that the best path is often hidden or unconventional.
This lesson revolutionized his approach to investment. Dalio and his team realized that proper diversification could reduce risk without harming returns. The typical idea of diversification at the time was to have a mix of investments within one asset class—for example, buy a hundred different stocks instead of one, or invest in wheat, sugar, and corn instead of just one commodity. However, the investments within the asset class still strongly generally rose and fell together.
Bridgewater found that the key was to add assets that were uncorrelated with each other. The result of this true diversification was a return-to-risk ratio that was multiple times better than their previous strategies, meaning they could make more money with lower risk of losing money.
Based on these principles, Bridgewater introduced a new fund called Pure Alpha. Even though the strategy wasn’t proven in practice, some clients believed in the concepts and invested. It went on to make money in 23 out of the 26 years since it started and has made more money in total than any other fund ever.
Successful Companies Choose And Over Or
Dalio applies the idea of diversification to investments, but he says you can use it no matter what business you’re in: Make a number of uncorrelated bets to reap the rewards without exposing yourself to too much risk.
In Built to Last, Jim Collins writes that enduringly successful companies employ a similar central concept:
They’re not limited by or. Successful companies don’t believe in scenarios where they must choose between seemingly contradictory choices A or B. For example, low cost or high quality, idealism or pragmatism. In the case of investments, the prevailing approach before Pure Alpha was high profit or low risk.
Instead they employ the power of and. Successful companies figure out a way to have both A and B. Collins says a good example is Johnson & Johnson, which was able to pursue both its ideals (alleviating pain and disease, putting customers and employees ahead of shareholders) and profits. In the case of Pure Alpha, investors saw high profits and low risk.
Dalio found success in investment not only because of this independent thinking, but also because of his discovery that he most often succeeded when he systematized his decision-making process into algorithms so clear that even computers could run them. In financial trading, he was able to visualize the market as being made up of individual cause-and-effect relationships. For example, the price of a T-shirt would depend on the fashion trends, how much water it takes to grow cotton or other materials, and how rain affects these crops. To Dalio, this looked like a machine that he could model and predict prices of.
(Shortform note: Dalio isn’t alone in thinking that looking at things as a system could be beneficial. In Thinking in Systems, author Donella H. Meadows writes that many aspects of the world operate as systems, and understanding how they work is crucial to solving problems and producing changes. But in contrast with Dalio, she believes systems are more complex than simple cause-and-effect relationships, consisting of a large set of interconnected elements.)
As Dalio rebuilt Bridgewater in the early 1980s, he used computers to turn his investment principles—looking at things rationally, analyzing historical data—into automated rules. This had a number of benefits:
(Shortform note: Real-time reporting, emotionless logic, and faster computing speed make automated trading more logical and efficient, but there are some disadvantages as well. These include mechanical or technical failures that could result in errant orders and over-optimization that leads to poor performance in a live market.)
But the computers didn’t work in isolation at Bridgewater—humans and the computers worked alongside each other and improved each other. The humans had imagination and logic that the computers didn’t, and could introduce new rules. The humans could also override the computer in unexpected situations, such as the September 11th terror attacks.
How to Invest Without Automation
Automation has clear benefits, but most people don’t have the power of automation behind them for their personal investments. You can keep from making ill-informed, emotional decisions by following some advice from economist and former portfolio manager Burton Malkiel in A Random Walk Down Wall Street:
Don’t be influenced by what others are doing. If everyone’s getting out of the market during a slump, stay in, because the market will eventually rise again. If there’s a boom, resist the urge to buy high, because the market is bound to drop.
Avoid hyperactive trading. Those who overtrade, or trade for short-term gains, tend to incur higher transaction costs and taxes, thus earning lower returns.
Sell losers, not winners. While a losing stock can rebound, selling it can give you tax breaks. On the other hand, selling winners can be subjected to higher taxes.
Never buy an IPO at its initial price. Studies show that IPOs underperform in the stock market and drop in value six months after going public.
Get a comprehensive introduction to finance and practical investment principles in our full guide to the book.
Starting from just Dalio, Bridgewater grew to 738 employees by 2008. Dalio says that this growth presented a dilemma: On one hand, it gave them a greater advantage with more talent. On the other hand, the influx of large numbers of new team members threatened their culture—there was reduced openness and engagement because it wasn’t possible for everyone to attend every meeting. Having to oversee more people also distracted the managers from the firm’s actual work.
(Shortform note: As Bridgewater’s example shows, growth has its pros and cons. Small businesses can manage the possible drawbacks of this growth in three ways: first, by hiring people who reflect the company’s vision and values; second, by re-evaluating your finances and budget plan; third, by using data to determine your strengths and leverage them; and fourth, by adjusting practices and processes to meet new demands.)
To preserve the Bridgewater culture as the firm grew, Dalio introduced five management tools:
Dalio kept careful notes of his principles and added more as he encountered new management situations. These included perspectives on hiring, firing, and compensation. Dalio shared these principles with Bridgewater managers, asking them to test them and refine them over time. With a large enough list of principles, no work situation was novel, and managers could make decisions without asking Dalio for advice.
New hires were given the principles and acclimated to them over 18 to 24 months. The principles enabled management at scale—anyone who had good character traits and followed the principles could be granted a large amount of autonomy and be trusted to make the right decisions.
Successful Companies Have a Cult-Like Culture
While this strict adherence to the principles has led some to describe Bridgewater as a cult, extreme measures to ensure employees are fully aligned with the company culture aren’t unusual in business. In Built to Last, Jim Collins describes the cult-like practices and characteristics of successful companies:
They have a tough screening process to ensure that new recruits are a seamless fit.
They indoctrinate employees by requiring them to attend orientation seminars.
They try to make employees feel like they’re part of an elite group.
Successful companies do all this not to turn people into robots, but to ensure that employees strongly adhere to the company’s core philosophy and can thus be trusted to work autonomously.
A key element of Bridgewater’s culture is extreme transparency (what Dalio calls “radical transparency”): Everyone should know how everyone else feels about everything.
When Bridgewater was small, this was easy to manage. But as the company grew, it was impossible to attend all the meetings and listen to all the informal conversations. This threatened extreme transparency because private conversations and office politics could skew the message.
To counter this, Dalio mandated that all meetings be recorded and accessible to anyone who wanted to listen to them. The only exceptions were personally sensitive meetings or confidential proprietary information. Having all meetings accessible allowed people to review why others made the decisions they did and formed valuable case studies for training new employees.
When Extreme Transparency Is Not Ideal
Other companies also employ some form of extreme transparency. For example, Patagonia practices “brand transparency”, allowing customers to access slides and interviews that discuss both good and bad qualities of their products. However, a high level of transparency is not appropriate for every situation (as even Dalio concedes). There are three areas where transparency can create problems:
Day-to-day activities where getting more people to weigh in isn’t only unnecessary but may also bog down decision-making
Salary information, which could breed resentment if pay isn’t clearly connected to employees’ performance
Creative work, where privacy can actually help improve performance—a communications agency found that bringing in clients early in the process for the sake of transparency can disrupt idea generation
Before introducing more transparency into your team’s workflow, carefully consider the impact. Ask yourself: How could this change slow down productivity or create negative feelings? Do the benefits of this transparency outweigh the costs?
Dalio says that people think and behave in very different ways. Understanding what type of person you are, and what type of people your co-workers are, is critical to working well together.
To determine potential employees’ personality types, Bridgewater has them undergo psychometric assessments, such as the Myers-Briggs Type Indicator. The information allows the firm to determine which jobs are best suited to the applicants.
(Shortform note: Eighty-nine of the Fortune 100 companies use the Myers-Briggs test, whether during the hiring process or in training. But experts have disregarded this test for several reasons. Apart from being developed by people who had no formal training in psychology, it’s also based on untested theories, produces inconsistent results, and relies solely on binary outcomes—you’re either introverted or extroverted, feeling or thinking, nothing in between.)
Dalio found that just knowing employees’ personality types wasn’t enough to form a clear picture of what they were like. People would enter meetings and ignore each other’s personality differences, assuming everyone was equally good at all tasks and assigning jobs to people who didn’t have the right skills. For example, someone who didn’t care about details might be given detail-oriented tasks.
To make the differences between his people’s skills and abilities more explicit, Dalio started making personality profiles (what he called “baseball cards”) that showed each person’s strengths and weaknesses, along dimensions like inquisitiveness, outgoingness, conflict resolution ability, and assertiveness. He’d compare data from the personality profiles with the key qualities necessary to different tasks to decide which people were best suited for which jobs.
This level of transparency met with resistance at first because people were afraid that their profile would misrepresent or pigeonhole them. However, over time the Bridgewater team found it freeing because they could be true to themselves and not have to hide their weaknesses.
(Shortform note: While Dalio believes that showing and discussing weaknesses is important, a study suggests that being vulnerable can undermine your credibility if you’re in a leadership position. So, instead of showing everyone how vulnerable you are, author Brené Brown suggests having a small group of people that you can confide in. That way, you still reap some benefits of showing weaknesses, but you protect your wider reputation.)
Dalio aims to automate Bridgewater’s management system just as he did their investment system. He writes that they still have a long way to go, but they’ve started with tools like an app that all employees run on their iPads, allowing them to rate other employees in real time during meetings. They rate attributes such as expertise in the topic area, creativity, and open-mindedness. Over many meetings, the app collates these ratings to create a clear representation of each person’s strengths and weaknesses, showing which persons are most credible in specific areas.
(Shortform note: Some companies have taken management automation a step further, replacing human managers with artificial intelligence (AI) to optimize productivity. AI can measure everything from productivity to empathy, as in the case of call center workers who are rated based on the emotions they exhibit during a call. The main concern with this method is that robot managers try to create “robot employees”—that is, they try to make workers keep up an untenable pace, require them to display just the right amount of emotion dictated by an algorithm, and subject them to injury, burnout, and a loss of autonomy in the quest for hyper-efficiency.)
As we’ve already noted, Dalio’s early failures led to the belief that the best way to be right was for smart people to disagree with each other and explore each other’s reasoning. He never failed to point out when other people were mistaken, and he expected others to do the same to him. Unfortunately, some people found his candor abrasive and oppressive.
Dalio had never intended to humiliate people, and the pushback from those he treated with candor prompted a realization that people didn’t understand his logic and process of decision-making. This friction kicked off his process of clarifying his principles in writing, so that everyone across the company could understand his intentions and behavior, and so everyone had a common set of rules to treat each other respectfully.
How People Management Has Evolved
Dalio is an advocate of automation and emotionless candor, and many companies have followed suit. But the Covid-19 pandemic has seen the rise of new trends in people management, highlighting the need for empathetic managers and for relationships with employees to become more emotional.
The Harvard Business Review gives the following tips to help managers stay in step with the shift:
Have vulnerable conversations among peers. Have one-on-one conversations with other managers about their specific challenges and circumstances. This allows you to practice empathy and gives you a safe place to determine the right amount of care to communicate.
Provide support. One fully remote company has a “team success partner” who helps foster trust within teams by facilitating conversations and helping new team members adjust.
Rethink workloads and reporting lines. Companies may have to re-evaluate workloads and make adjustments to enable managers to focus on building stronger relationships with fewer individuals.
After putting together and refining a clear set of principles, Dalio felt that he had a shareable blueprint for success. He thus turned his eye toward the next phase of his life: using his principles to help other people become successful even after he was gone. In particular, he focused on passing on the management of Bridgwater and passing on his principles to the world.
After codifying his work principles and turning them into algorithms that could automate management decisions, Dalio stepped down as CEO in 2011. He handed the reins to two co-CEOs, Greg Jensen and David McCormick. Jensen was a veteran at Bridgewater, having been there for 15 years; Dalio saw him as a son. After stepping down, Dalio continued serving as a co-CIO along with Jensen.
However, Dalio says that the management transition was rockier than expected, and the senior management was not succeeding in their roles. In 2016, the Bridgewater committees voted for Jensen to step down as co-CEO. Dalio notes this was personally painful given their history, but it was ultimately the best decision for the company. Dalio returned as co-CEO for a year to stabilize the company.
(Shortform note: In the book, Dalio refers to sensational media coverage of the transition. A Wall Street Journal article reported that both Jensen and Dalio had grievances with each other. Jensen was disappointed that Dalio was not being as hands-off as he had promised. Dalio was disappointed that Jensen had said something about him in a recorded meeting instead of saying it to his face—a gross violation of extreme transparency.)
Dalio realized that much of the difficulty in passing on Bridgewater’s management came from his unique status as a founder, having run Bridgewater for decades without any formal checks and balances. After he left, CEOs needed a governance system to hold them accountable, and to replace them if they weren’t capable. He noted how, with proper governance, no one person should be more powerful than the system.
(Shortform note: One expert says that a proper governance system requires three mechanisms to help monitor and hold CEOs accountable for their behavior: 1) peer management among executives, 2) anonymous tip lines where employees can report concerns, and 3) a board of directors that reviews the CEO’s performance and behavior.)
Dalio came to the realization that his purpose, as well as everyone else’s purpose, is to evolve through struggle, take important lessons from that struggle, and help others evolve as well. Principles is his attempt to pass on the knowledge his experiences have taught him. He believes that his principles will resonate even after he’s gone, and he hopes that others can apply the same lessons to help them through their own struggles.
(Shortform note: With the desire to reach a wider audience and broaden the impact of his lessons, Dalio later released Principles in more easily digestible and accessible formats. There’s Principles for Success, an animated series distilling the main ideas from the book into eight short episodes, as well as a picture book with the same title. Dalio says the picture book is simple enough for a six-year-old, though reviewers say it’s more suited to older children.)
In Part 2, we’ll cover Dalio’s main principles and how you can use them to better deal with struggle and make better decisions in both life and work. We’ll start with one of the strongest themes of the book: understanding the importance of finding the truth.
After his emotions and overconfidence led to disastrous mistakes, Dalio learned that he made the best decisions when he put his ego aside and relentlessly sought the truth. In this chapter, we’ll explore how to overcome the barriers to recognizing the truth.
When you’re struggling, Dalio says you shouldn’t fall into the trap of wishing that reality were different or how things “should” be. This will bias your objectivity and get you nowhere. Instead, embrace your reality and deal with it. You must be totally receptive to the possibility that you are wrong.
If you think something is morally wrong, Dalio says to assume that you’re wrong and figure out why what nature is doing makes sense. Nature optimizes for the whole, but people narrowly judge good and bad based on how it affects the individual. For example, a pack of hyenas killing a young wildebeest feels wrong, but on reflection, it’s clear this is good for the evolution of the wildebeest and for the total system.
(Shortform note: Dalio believes that everything adheres to nature’s laws, including social and financial systems. However, some people would argue that the laws that apply to animals do not necessarily apply to humans. For example, philosopher Karl Marx posits that humans operate on a level called “species-being.” At this level, humans are conscious of what they do and why—we don’t operate on the animalistic level of instinct, but on reflexivity, values, principles, and conscience.)
Dalio says that when it comes to assessing a situation, you should always assume that something is missing. Even the safest-looking bets have risks, so instead of declaring “I’m right,” ask, “How do I know I’m right?”
(Shortform note: Questioning what you know, as Dalio suggests, helps you arrive at the truth. However, in the process of filling in the gaps of your knowledge, take care not to fall into two traps, as described in 21 Lessons for the 21st Century: The first trap is the knowledge illusion, or mistaking group knowledge for individual wisdom and being unaware of your own ignorance. The second trap is groupthink, or surrounding yourself with people who echo views that may be flawed.)
Dalio warns that there are two things that often get in the way of seeing reality: your ego and your blind spots.
Dalio writes that there are two “yous”: a high-level rational, conscious you, and a lower-level emotional, often subconscious you.
The lower level is where your ego hurdle resides. Your ego is your underlying desire to be capable, to be seen by other people as capable, to be loved, to feel important, and to be praised by others. Experiences that threaten that ego—those that make you feel irrelevant or that point out your weaknesses—are painful. To avoid this pain, you might shut yourself off from self-reflection or deny reality.
To protect yourself from the pain of a bruised ego, the subconscious you hijacks your brain and actions, so you end up reacting spontaneously and emotionally without thinking.
(Shortform note: Allowing your ego to take over can harm you in more ways than the one Dalio describes. In Ego Is the Enemy, author Ryan Holiday mentions three ways that ego can keep you from being successful: First, it can lead you to brag and self-promote instead of taking action. Second, it can make you feel like you know everything, which prevents you from growing. And third, it can make it especially difficult for you to recover from failure.)
Dalio outlines three ways you can prevent your ego from taking over and holding you back from success:
Dalio says you should pay attention to the signals your body is sending you, such as your chest tightening, your blood pressure rising, or your heart rate increasing. This means that your emotional self is taking over. Train yourself to get out of this hijacked state, so the rational you can gain control.
(Shortform note: In training yourself to get out of this hijacked state, it helps to recognize the three emotions that people find most difficult to regulate: anger, anxiety, and sadness. In Emotional Intelligence, author Daniel Goleman says you can manage these emotions by using relaxation techniques like deep breathing and by scheduling pleasant distractions like watching TV or listening to music.)
Dalio says that pain is a necessary part of getting stronger. He sums it up in his equation: Pain + Reflection = Progress. He says that when you make a mistake, take full responsibility for it and relish the chance to get better, rather than being ashamed about it.
Dalio notes that plenty of people at Bridgewater make very costly mistakes. A common corporate reaction is to fire these people, but Dalio thinks this just encourages people to hide their mistakes. Instead, he says that reflecting on mistakes as a team and striving to do better is the best way forward, so Bridgewater has an “issue log” where employees must add each of their mistakes.
Different Formula, Similar Principle
Dalio uses the equation of Pain + Reflection = Progress to show how you can use your mistakes to get a better outcome in the future. In The Success Principles, author Jack Canfield offers a similar formula for improving outcomes: Event + Response = Outcome:
Event: something that happens in your life
Response: how you choose to respond to the event
Outcome: the result of how you choose to respond to the event
According to Canfield, there are two possible responses. You can either blame the event for your outcome, or you can adjust your response until you get your desired outcome. The latter is the best course of action because it means you take responsibility for the quality of your life and believe that it’s within your power to improve it. Both formulas—Dalio’s and Canfield’s—require you to accept your role in your situation instead of blaming outside forces.
You may think that striving to get better by embracing your mistakes is for the sake of material rewards, like more money or a bigger house. But Dalio notes that beyond the basics like shelter, relationships, and food, the benefit of the marginal improvement from material gains drops off quickly.
(Shortform note: Some research refutes the idea that happiness plateaus after a certain income level—many people do report that their happiness consistently increases alongside their income. However, this doesn’t mean that people with lower incomes can’t be happy, or that wealthy people can’t be unhappy. Experts say that happiness is multifaceted, and you can increase your feelings of well-being by putting more joyful effort into everyday tasks and forging connections with other people.)
The real prize that gives you the most satisfaction is getting better and stronger from the struggle. Evolving and improving helps you ascend to higher and higher levels, allowing you to tackle bigger challenges. What once seemed impossibly complex becomes simple.
Because the struggle for self-improvement is so fulfilling, Dalio says you shouldn’t deprive other people of their chance to struggle. Deny them what they want to give them the opportunity to struggle, which will lead to strength.
(Shortform note: Dalio cites Carl Jung, saying that it’s a natural law that you have to push your limits and experience pain to become stronger. The Current Affairs review challenges this struggle-centric outlook, arguing that it’s a law better applied to muscular development and that it’s possible to make progress without experiencing much pain.)
Dalio argues that the best ideas and decisions may come from the cooperation of the two yous, not when the rational you completely subjugates the subconscious you. For example, sometimes the greatest inspiration “pops up” from our subconscious. This happens most often when you’re relaxed and not consciously forcing yourself to come up with great ideas. The conscious logical mind then examines the ideas for how good they are.
(Shortform note: You can see the power of your subconscious mind in action when you dream. In Why We Sleep, author Matthew Walker writes that in the dream stage of sleep, when you’re fully relaxed, you create novel connections between ideas, which increases creativity and problem-solving ability and leads to a higher-level comprehension of ideas.)
Dalio personally likes transcendental meditation to connect the conscious to the subconscious. He says that meditation creates an equanimity that allows clearer and more creative thinking.
(Shortform note: Aside from creative thinking, you can also use meditation to understand your biases and fears. Understanding your own mind in this way can help you make better sense of the world and lead you to act more wisely and effectively.)
Reconciling the two yous isn’t just something you do on a personal level. It’s also something you have to consider when talking to someone else, because you’re dealing with their two yous. You can be engaged in one of four conversations, without realizing which one you’re in: Your subconscious you might be talking to the other person’s rational you, or vice versa; or both of your subconscious emotional yous are battling with each other. This leads to misunderstandings and arguments.
(Shortform note: Navigating the conversation between the two emotional yous effectively requires you to recognize and manage your emotions as well as the other person’s emotions. This means understanding how your emotions affect you, knowing how to calm down when an emotional response surfaces, and being aware of the triggers of the other person’s response.)
In addition to overcoming your ego hurdle, Dalio says you need to overcome your blind spot hurdle. Your blind spots materialize when you see the world through your own biased lens. You can’t appreciate what you can’t see, any more than a color-blind person can know what color is. Thus, Dalio explains, two people who see the world very differently often end up arguing over who’s right without understanding their own blind spots.
(Shortform note: Leaders are especially prone to having blind spots. In Creativity, Inc., Pixar co-founder Ed Catmull says this is due to three factors: First, employees want to look competent in front of their bosses, so they aren’t honest about issues. Second, a middle manager might make it challenging to report any mistreatment. And third, the size of some organizations makes it difficult to get all perspectives.)
The solution to both the ego hurdle and the blind spot hurdle is total receptivity (what Dalio calls “radical open-mindedness”), which we’ll discuss in the next chapter.
Endure the pain of reflecting on your mistakes to improve for the future. Remember Dalio’s formula: Pain + Reflection = Progress.
Write down some of the most salient mistakes you’ve made in the past 12 months.
Connect the dots between these mistakes. What patterns do you see? What weaknesses were common between these mistakes?
Write down your one “big challenge”—the weakness that most blocks you from getting what you want.
Why does this weakness exist? What specifically are you going to do to get over this weakness?
Think about this reflection as a puzzle that, when solved, will make you strong and help you level up. How do you feel emotionally about the mistake now?
Dalio says that to overcome your ego and blind-spot hurdles and make the best decisions, you must be open-minded. This means accepting that you might be wrong and relentlessly seeking out ways to increase your chances of being right.
One of the methods Dalio suggests to increase your chances of being right is to be totally receptive to information from others, especially highly credible people. Here’s how you can become more receptive to others’ input:
Dalio says you should accept the possibility that others might see something better than you and point out threats and opportunities you don’t see. You’re looking for the best answer that exists, not the best answer that you can come up with yourself. Keep in mind that the probability of always having the best answer is very small.
(Shortform note: Psychologist and author Jordan Peterson has a similar view. In 12 Rules for Life, he writes that you should go into a conversation genuinely believing that you have something to learn from the other person. Otherwise, you’ll end up trying to convince each other of your respective positions and find it difficult to have a fulfilling conversation.)
Dalio suggests two reasons you might hesitate to get other opinions:
When accepting viewpoints from others, suspend your judgment and empathize with their viewpoint. Dalio says you shouldn’t punish others for speaking their mind by criticizing or mocking them. Make clear you want to understand their perspective and aren’t trying to prove them wrong. After all, they have their own ego hurdles to contend with and may not be receptive to your ideas.
(Shortform note: It may be difficult for you to overcome your ego hurdle and get ideas from others, but in the long run, listening to others without judgment or criticism allows you to learn from their mistakes and avoid them yourself. To become a better listener, Jordan Peterson advises summarizing what the other person is saying to make sure that you understand them and that you find the most valuable insights.)
While getting other opinions is crucial, you can’t put your full trust in every opinion you get. Weigh a person’s opinions by how knowledgeable they are about the subject in a process of credibility-centered decision making—the opinions of people who are more credible weigh more heavily than those who are less credible. (At Bridgewater, this procedure is called “believability-weighted decision-making.”) This is distinctly different from weighing everyone’s votes equally, as in a democracy.
Credible people are those who have repeatedly succeeded at the situation in question and can logically explain their process. It makes sense that you’ll most often value the opinions of successful people more than those with little experience. However, Dalio says you should recognize that great ideas can come from inexperienced people, since they are not set in their ways as much as veterans are.
If you lack credibility in any area, Dalio says you should spend more time asking questions and trying to understand other people’s logic than pushing your own ideas. Stress-test your ideas with other credible people and with real data. Learn to articulate clear logic behind each idea rather than just basing input on hunches.
But What About Introverts?
Introverts might have a hard time speaking up to expand on their reasoning, so they might find it challenging to increase their credibility in a system like Bridgewater’s. The book Quiet gives tips to help introverts thrive in an environment that requires assertiveness:
Be assertive on your own terms. You don’t have to mimic extroverts’ tone and forcefulness. Instead, express yourself using words that feel comfortable to you.
Be prepared. Going over the meeting agenda and jotting down your thoughts beforehand can make you feel more confident about speaking up.
Use your strengths. Introverts tend to be great listeners. Focus on what the speaker is saying, process information that others might have missed, and contribute when you’re ready—don’t just talk for the sake of talking.
As mentioned in the previous chapter, it’s important to recognize that you have blind spots and to ask others to help you see them. Review bad decisions that you made because you failed to see what others saw. Dalio says that if you willingly blind yourself and keep doing something wrong, you will never maximize your potential.
Even if you believe your baseline probability of being right is already high, Dalio believes it’s always valuable to raise your probability of being right by being open-minded to other viewpoints.
How to Manage Blind Spots
As a leader, you have to be especially mindful of blind spots. Ed Catmull gives the following tips for dealing with this hurdle in Creativity, Inc.:
Make sure you’re getting accurate information. Keep in mind that employees may just tell you what they think you want to hear, so don’t take information at face value and dig deeper.
Encourage people to be more vocal. Communicate that you want them to speak up about issues so that they’ll be more comfortable about telling you the truth.
Get closer to the issues. If you’re in a big organization, get the input of those who are directly involved with or have a strong sense of the issues within their departments.
Dalio notes that a common problem, especially among high achievers, is wanting to be the one to produce the correct answers. This desire can make you close-minded to other ideas and what other people have to offer. Often, you may try to be open-minded, but, having already made up your mind, you ask for ideas simply to confirm your opinion, not to open your mind to change.
If you truly value being right and having the best ideas above all, you shouldn’t care if the right answer comes from you or from someone else. Focus on finding the truth and the best ideas.
(Shortform note: When searching for the right answer, you might have a tendency toward confirmation bias: choosing evidence, sometimes unconsciously, to support your ideas. In The Black Swan, author Nassim Nicholas Taleb suggests getting past confirmation bias by using a technique called negative empiricism, or actively looking for evidence that disconfirms your ideas.)
To become more receptive to other people’s perspectives, Dalio says you need to be humble and open-minded, and you need to be aware of what you know and how you reason. One without the other is suboptimal: If you’re very open-minded but are weak when it comes to reasoning, you’ll have problems picking the right people and ideas. If you have good reasoning but aren’t humble, you miss out on better ideas. If you’re not humble and you’re weak when it comes to reasoning—meaning you know little, yet you’re convinced you know everything—then you remain stagnant.
(Shortform note: This is similar to the Dunning-Kruger effect, a cognitive bias where people who are bad at something are incapable of recognizing how bad they are. In an interview, psychologist David Dunning explained that you can become more aware of your cognitive blind spots by thinking about what you don’t know and exposing yourself to people with different perspectives.)
To Dalio, making the best decision doesn’t just require being open-minded to other people’s ideas. He believes that it also requires honesty and transparency. This works hand in hand with total receptivity—you can’t be truthful about issues, or hear truth about issues, when there’s the possibility of someone feeling defensive or hurt. At Bridgewater, this manifests in a culture of extreme honesty (what Dalio calls “radical truth”) and extreme transparency (what Dalio calls “radical transparency”).
Dalio says that extreme honesty means not putting a filter on your thoughts. Instead, you reveal them, question relentlessly, and surface issues immediately instead of hiding them.
Extreme honesty creates a powerful type of freedom. When you align what you feel and what you say, life gets simpler. You can focus on the most important things, and you’ll be happier.
(Shortform note: Studies show that being authentic—behaving according to your true thoughts, personality, and values—leads to happiness; in particular, it leads to higher levels of life satisfaction and lower levels of distress.)
When an entire organization operates with extreme honesty—bringing issues and weaknesses to the surface—team members can address disagreements when they first appear, rather than letting them fester under the surface. In contrast, Dalio claims, when a workplace operates on dishonesty, people tend to hide their real thoughts, and they bury problems and disagreements. This aggravates misunderstandings or disagreements and leads to larger conflicts and distance between team members.
(Shortform note: The pursuit of “radical truth” can be detrimental to an organization, particularly when people get caught up in pursuing inessential truths. A New York Times article reports that Bridgewater meetings can last for hours because employees argue about matters of little consequence, such as the meeting agenda.)
Bridgewater’s culture of extreme honesty means that everyone has not only the privilege but also the obligation to speak up publicly. Dalio expects that when he does something foolish, other people will tell him so immediately. To him, doing otherwise would be unproductive and unethical. This practice works best in a place like Bridgewater where people actively set aside their egos—you can’t expect others to adhere to extreme honesty if you react emotionally every time they’re honest with you.
(Shortform note: Apple’s Steve Jobs had a similar approach, insisting that people should be able to give fearless feedback. Apple even gave out an award to those who stood up to Jobs.)
People at Bridgewater are also obligated to say what they want to say to people’s faces, instead of talking behind their backs. Dalio believes that gossip shows a lack of integrity and is considered the worst thing possible at Bridgewater.
(Shortform note: While gossip is viewed negatively at Bridgewater, some research suggests that it has some positive effects: People who hear gossip about themselves can use the information for self-reflection and improvement. Additionally, harmless gossip—the neutral, nonjudgmental sharing of information about others—can also help teams form stronger connections.)
Often the cost of extreme honesty is the discomfort that follows open criticism. But Dalio says telling people what they need to improve, though uncomfortable, should be seen as a sign of care and respect. If you’re clear that your purpose is to arrive at the truth and not to prove anyone wrong, there won’t be any misunderstandings about your intent.
In essence, extreme honesty is an organizational reflection of Dalio’s formula, “Pain + Reflection = Progress.” People who can internalize this formula on an individual level can operate similarly on the organizational level.
(Shortform note: A key to applying Dalio’s formula meaningfully is taking care not to turn reflection into rumination, which means dwelling on negative, self-flagellating thoughts. Instead, use your reflection time to yield greater insight and self-awareness by replacing “why” questions (“Why did this happen?”) with “what” questions (“What’s going on?” What’s another way of looking at this?”). Asking “why” is past-oriented and makes you focus on your limitations, while asking “what” is future-oriented and makes you see your potential.)
Extreme transparency lets everyone see everything. Dalio says that everyone in an organization should get access to the full truthful information, rather than having it filtered through other people first. In turn, people with more complete information can make better decisions, and the organization draws on the full power of its people.
At Bridgewater, extreme transparency means all meetings and interviews are recorded and made available to the entire team, personality profiles show each person’s strengths and weaknesses, and an app allows everyone to rate each other in real time.
A Different Approach to Extreme Honesty and Transparency
Extreme honesty and transparency can build trust within a team, help people grow, and increase efficiency. Dalio’s version of it seeks to remove emotions from the equation, but the book Radical Candor has a different approach. Author Kim Scott writes that the two crucial components of radical candor are:
Caring personally—this means seeing employees as people and not just as workers. Keep in mind that work isn’t “just business,” and recognize that employees have a life outside of work that may be affecting their job performance.
Challenging directly—this means giving criticism in private to help improve performance. Scott writes that public criticism (which is the norm at Bridgewater) triggers defensiveness and anxiety within a team.
Dalio says that extreme transparency is good for the workplace because:
Dalio suggests that you should be extremely transparent in organizations as a default, with very few exceptions. Often the most difficult information to share is the most important to share, because it builds the trust of people you are sharing it with. Bridgewater only has a few exceptions to its transparency rule:
(Shortform note: Some opine that these exceptions highlight the firm’s hypocrisy, as they champion extreme transparency only when it’s in their own best interest. While Dalio says that information that is personal, is low-value, or puts Bridgewater or its clients at risk are exceptions to transparency, Bridgwater has somewhat murky disclosures in government filings on assets, fees, and ownership. In a complaint against Bridgewater over gender discrimination and contract disputes, former co-CEO Eileen Murray also alleged that the firm sought to punish those who shared facts to the public.)
Extreme honesty and transparency have a number of benefits and lead to better decision-making, but they aren’t easy to execute. Dalio cautions against two issues in organizations:
Dalio warns that people will continue to lie, and there will be dishonest people no matter what you try to do. You shouldn’t be naive about this. When liars are caught, they’ll say they’ll never do it again, but they most likely will.
Yet Dalio doesn’t see firing people over dishonesty as an absolute rule, since firing everyone who has ever lied would mean he’d have no one to work with. Instead, he says you should treat each case of dishonesty independently, and decide what to do based on the severity of the transgression and the prior history. Get rid of habitual liars. Then deter future bad behavior with “public hangings” where violators are made examples of.
Helping Employees Forward From a “Public Hanging”
Being publicly berated for their mistakes can have a negative impact on employees and make them feel more anxious at work, but it can become a positive learning experience if they know how to respond. Aside from reminding people about total receptivity and the importance of learning from their mistakes, you can help them move forward by adopting the following strategies from So You’ve Been Publicly Shamed:
Write a new narrative. Help them realize that they are more than their mistake.
Manage shame. Help them find ways to reframe the situation to take the humiliation away. Author Jon Ronson cites the example of a porn star who manages the shame associated with her industry by seeing the scenes she acts in as “awesome.” While employees might not see a “public hanging” as awesome, they can learn to see it as a turning point for improved performance and greater success.
Dalio acknowledges that extreme honesty and transparency are very different from how most places operate, so most people will need an adjustment period after they adopt the principles. (For reference, Bridgewater finds that new employees can take 18 months to adjust fully, and many people never adjust at all and leave.)
Help New Hires Adjust
New hires at any organization may struggle at first because they aren’t yet familiar with the inner workings of the company, whether it’s one as unique as Bridgewater or not. Help ease the adjustment period by reassuring them that their first priority is to learn the ropes, not to actually be productive. To support them, focus on three areas of learning:
Technical—the products, systems, and technology they’ll be using
Cultural—the attitudes and values of the organization
Political—the decision-making process and people involved
Regularly check in with them to see their progress rather than leaving them to fend for themselves, then step in to support them when necessary.
Having the foundations of total receptivity, extreme honesty, and extreme transparency sets you up for productive conflict and an environment where you let the best ideas win (what Dalio calls an “idea meritocracy”). These two vital practices ensure that you make the best decisions possible in an environment where opposing ideas are freely shared. Let’s explore each in detail.
Recall that open-mindedness will bring you in contact with smart people with different perspectives, meaning you may disagree with them. As discussed in the section about ego, each person brings two “yous”—the rational and the emotional—to a conversation, so these disagreements often have four yous in conflict with one another. Dalio says that the key to moving the conversation in a useful direction is to have productive conflict (what Dalio calls “thoughtful disagreement”) with the other person: Your goal is not to prove that you’re right, but rather to find out which view is true and decide what to do about it.
Dalio says that productive conflict requires that you be open-minded and assertive at the same time. You must make an effort to see things through the other person’s eyes, while communicating clearly how you see things. You’ll arrive at the best ideas when you’re both driven by the fear that you’re missing important information and the desire to find the best way forward.
(Shortform note: When you’re assertive without being open-minded during conflict, you have what’s referred to as a “combative mindset,” which, of course, won’t lead to productive conflict. In The Anatomy of Peace, the Arbinger Institute says that this mindset may come from a feeling of superiority, inferiority, or entitlement, or a desire to be seen in a positive light. Overcome your combative mindset by being aware of your triggers and reactions, then recalling situations where you reacted positively. This can help you shift your perspective and see the conflict through a different, more productive lens.)
As you continually practice seeking out other opinions, Dalio says you may find that people will be naturally reluctant to disagree with you. This might be because they’ve been trained to agree to maintain social cohesion, or because they want to avoid emotional explosions. The trick is to engage in productive conflict without triggering emotional explosions. Dalio offers some tactics for productively disagreeing with others.
(Shortform note: Dalio insists that it’s important to remove emotion from a conversation and to approach things completely rationally. However, the book Difficult Conversations argues that emotional explosions—crying, lashing out at others—are actually a result of repressing your emotions as Dalio suggests. The authors write that feelings are valid and are an integral part of conflict, and they should be managed instead of contained. Read our full guide to find out more about the importance of emotions in conversations.)
According to Dalio, humans evolved to support cooperation. Groups that work together accomplish more than individuals who work for their own self-interest. Thus, it’s important to use productive conflict to work through disagreements, ultimately leading to cooperation. In addition to practicing credibility-centered decision making, Dalio also recommends that you:
Ask questions rather than make statements. (Shortform note: Asking yourself questions can also help you work through disagreements. One question you can ask is, “What would happen if I was wrong?” If the only downside is that your ego would be hurt, then it’s time to move on from the disagreement.)
Focus more on the substance of what is being said, rather than the style of it. Even if the other person says something somewhat sarcastically or in a tone you don’t like, don’t automatically assume it’s a criticism. Try to focus on the core of what they’re saying. Repeat back to the other person their own perspective to make sure you understand it. (Shortform note: According to Difficult Conversations, confusing someone’s intent with their impact is what leads to misunderstanding. Repeating what you’re getting from the conversation ensures that this confusion doesn’t happen—you both clearly understand the intent.)
Discuss respectfully and dispassionately. Calmly call out the other person when the disagreement gets too emotional. If you start talking over each other, engage the two-minute rule—each of you can claim two minutes to get your main thoughts out without interruption, while the other person has to stay silent and listen. (Shortform note: When emotions are running high or the other person refuses to listen, you can verbalize what’s happening in the conversation. For example, if the other person is being impatient and rushing through the conversation, you could say, “I’ve noticed that you seem to be short on time. Can we schedule a meeting so that we can focus on this?” However, this can increase tension, so carefully consider if it’s a suitable tactic for your particular conversation.)
If you can’t agree, find a person you both respect to moderate. (Shortform note: Even with a moderator, sometimes you just won’t be able to come up with a solution that’s satisfactory to both parties. In this case, you need to decide whether it’s better for you to settle or to accept the consequences of not settling.)
Practicing productive conflict and credibility-centered decision making, combined with the foundational principles of extreme honesty and transparency, is critical to building an environment in which the best ideas win, regardless of where or whom they came from. Dalio believes that this environment creates the best system for making decisions because you have more information from different people, rather than limited information from just one person whose perspective may be limited by blind spots.
Dalio says that the best way to build an environment in which the best ideas win regardless of their source is to bring together smart, independent thinkers who can engage in productive conflict and get past disagreements using agreed-upon systems.
(Shortform note: If you plan to implement this principle, it’s important to create an environment where people feel comfortable going against the consensus. In Originals, Adam Grant says you can surface dissenting ideas by gathering people who have diverse viewpoints and a reputation for speaking up. You can also ask employees to name other people who aren’t vocal enough about their ideas. Grant cites Bridgewater as an example of an organization that does this well.)
In addition to total receptivity, extreme honesty and transparency, productive conflict, and letting the best ideas win, Dalio says that viewing complex systems as machines can help you make better decisions.
He explains that laws and forces in the universe interacted and evolved to create galaxies, planets, markets, and humans, and that all these complex machines continue to evolve and interact to create our reality. To him, understanding the cause-and-effect relationships within each machine and between machines can help you glean predictable patterns. Seeing the same situations happen again and again over time can then help you determine corresponding repeatable courses of action.
(Shortform note: Dalio believes that everything that happens has already happened before, so it’s possible to predict and manage future events by looking to the past, using a set of principles to weather any kind of storm. In contrast, Nassim Nicholas Taleb argues that the world is random and unpredictable, and the important thing isn’t to withstand difficult situations, but to actually learn how to become stronger under stress. Read more in our full guide to Antifragility.)
We’ll explore how Dalio applies this view on the individual level, the market level, and the organizational level.
Dalio says that first and foremost, you should think of yourself as a machine: You take in inputs (such as goals, resources, and current skills), and you produce an output (progress toward your goals). Your aim is to design your machine to produce better outcomes—or in other words, design your life in service of achieving your goals. Viewing yourself in this way enables you to see your weaknesses objectively.
Dalio reiterates that you should look at your weaknesses as problems to be fixed instead of ignored, because ignoring them can lead to bigger problems. Think of it in terms of a machine: If your car breaks down, you would have it fixed instead of letting it deteriorate.
(Shortform note: Dalio’s suggestion here may seem unusual, as it goes against a common piece of career advice: Ignore your weakness and focus on your strengths. However, overplaying your strengths also has two downsides: First, your strengths can turn into weaknesses. For example, if being vocal is your strength, you might overdo it and become overbearing. Second, when you focus too much on a specific skill set, you can become a lopsided leader with limited capabilities. Reflect and ask others to help you determine if you’re overdoing your strengths, then recalibrate if necessary.)
Dalio says you’ll never be able to be proficient at all the things necessary to reach your goals because nobody can be proficient at everything. For example, even Albert Einstein, with all his strengths, was incompetent at other things like basketball, while basketball great Michael Jordan isn’t a quantum physics hall-of-famer.
Don’t be upset if you find you’re bad at something—be happy you found out, since this will give you a better idea of what’s holding you back and improve your chances of meeting your goal. Once you find your weakness, Dalio says you have two options:
1) Improve yourself. Dalio recommends improving your skills by doing mental exercises like reflecting on your painful mistakes and deliberately practicing things that are uncomfortable for you. For example, you can practice being more talkative or following through on your plans.
(Shortform note: These mental exercises have the added benefit of making you acutely self-aware. This strong sense of self enables you to accept other people’s opinions more openly and to communicate more effectively, writes John C. Maxwell in The 5 Levels of Leadership.)
2) Ask others to fill the gaps. You can try to work on your weaknesses, but some skills are just inconsistent with your nature. For example, some visionaries are bad at execution and details, and they can only change the way they see things so much. In cases like these, it’s probably better to ask those with complementary strengths to step in so that you can focus on your own areas of strength.
(Shortform note: Maxwell writes that to properly fill in your strength gaps, you should know exactly what skill you’re looking for and recruit specifically for it. It’s no use hiring a stellar candidate who doesn’t have the skills you need. For example, if your baseball team is in need of a good pitcher, you’re not going to recruit a star batter, no matter how good he is.)
The second area that you should look at as a machine is economics. As a financial trader, Dalio learned to see the market as composed of a network of things that had cause-and-effect relationships with each other. For example, how much livestock there was and how much they ate influenced the demand for corn and soybean.
By visualizing the market in this way, Dalio was able to figure out repeatable trading rules. He broke them down into components, understood how each part worked, and proposed solutions based on the cause-and-effect relationships within the machine.
Can the Past Really Predict the Future?
Dalio believes that every event has happened before, even if it wasn’t during his lifetime, and so it’s possible to determine cause-effect relationships and predict outcomes within the economic machine. However, former options trader Nassim Nicholas Taleb argues that every system has “black swans”—events that are by their very nature unpredictable and thus cannot be accounted for by any machine.
In The Black Swan, Taleb writes that one reason “experts'' often get predictions wrong is that they base their predictions on the past, which in itself has many unknowable factors. For example, if you see a small pool of liquid on a table, you can ascribe it to a melted ice cube or a spilled drink, but the number of possible causes makes it impossible to know for sure. Read more about black swans and how to prepare for them in our full guide.
The third area that you should look at as a machine is your organization.
Dalio says that the two most important components of an organization are its people and its culture. Getting the right mix of people who are aligned with the organization’s culture leads to the best outcomes. If your outcomes aren’t consistent with your goals, then you need to determine what’s wrong with the machine: There may be a flaw in the design of the organization itself or a problem with the people working in it.
(Shortform note: In the same way that you need to scan your “individual” machine for weaknesses to be addressed, you also need to understand and address the weaknesses of your bigger machine—your team. Watch out for the five dysfunctions of a team that typically prevent them from succeeding: an absence of trust, a fear of conflict, a lack of commitment, avoiding accountability, and inattention to results. You can read more about these team weaknesses in our full guide to The Five Dysfunctions of a Team.)
Visualizing your organization as a machine means coming up with the most efficient structure and giving everyone a clear idea of their roles and responsibilities. Dalio gives these pointers for managing or improving your organizational machine:
Imagine the ideal organization, and only then choose the right people for it. Don’t take the people you have and then fit an organization to them. (Shortform note: By assessing a candidate’s fit during the recruitment process, you can increase the likelihood that they’ll succeed at the role you put them in and stay longer with the organization.)
Clarify goals for each department. Don’t merge two distinct departments into one just because they have similar tasks. Instead, base departmental divisions or merges on goals to prevent misaligned priorities. For example, Marketing and Client Services both have the task of communicating with outside parties, but their goals aren’t the same: Marketing aims to make sales while Client Services takes care of existing clients. (Shortform note: When it’s necessary for departments to collaborate, it’s generally better for managers to communicate directly with the departments in question, rather than passing messages through top management. In cases when collaboration between departments can lead to conflict—due to differing goals, for example—come up with a detailed coordination system.)
Minimize the number of layers in the pyramid and reduce bureaucracy by making departments self-sufficient. (Shortform note: In Measure What Matters, venture capitalist John Doerr writes that traditional management systems tend to have a hierarchy, while the objectives and key results system (OKR) tends to have a top-down, bottom-up, and horizontal approach rather than the typical pyramid.)
Add governance and checks and balances. Governance is oversight that removes people and processes if they are failing. A company should have a board that determines if the people running the company are capable. This board should have reporting lines independent of the CEO’s reporting line to avoid conflict of interest. Dalio says the board can select CEOs but should not micromanage the firm, and board members must have the courage to hold people accountable. (Shortform note: Some companies have one person as both CEO and Chairman, but experts say that this setup isn’t ideal for a number of reasons: It prevents neutral governance and proper checks and balances, keeps an organization from the benefits of having two talented leaders with different skill sets, and can lead to more decisions that benefit the organization but harm customers and stakeholders.)
Make leadership a group effort. Dalio believes that having a single CEO has some disadvantages, like opening up an organization to more risk and overburdening one individual. Thus, Bridgewater has co-CEOs and co-CIOs to share the load. (Shortform note: While some believe that two heads are not better than one when it comes to running a company, others argue that two leaders can cover more ground.)
Dalio sees managers as organizational engineers in charge of building, maintaining, and improving the machine. They have the following responsibilities:
They use metrics to study how well the machine is doing. They compare the current outcomes with the ideal outcomes, and find ways to close the gap. (Shortform note: To focus on relevant metrics, former Intel CEO Andrew Grove recommends choosing those that measure output rather than activity, and that are physical and countable.)
They worry about what can go wrong with the machine. They constantly survey the landscape to find suspicious signs of problems. They also study what goes wrong in the machine—either it’s a problem with the machine’s design or with the people. (Shortform note: To be effective problem-solvers, managers should be able to emphasize transparent communication, foster collaboration, and execute well-planned strategies.)
They can anticipate the results from different inputs of people. They also expect that people will be imperfect, so they design a machine that produces good results even with mistakes. (Shortform note: Keep in mind that there’s a difference between making sure each individual is great and making sure the team is great. A manager’s role is to ensure that imperfect individuals collectively produce the best outcomes.)
They can sit back and watch the machine do its work. Having to micromanage is a sign of improper machine design or the wrong people in the roles. However, you should also take care not to be so distant from the details that you’re not managing at all. (Shortform note: Micromanagers typically have a difficult time with delegation. To delegate effectively, you should clarify why something is important to you and what you expect from your team, ask them how much guidance they need, and learn to say no.)
Dalio says that, as the designer of your machine, you are tasked with designing the team to best meet your desired outcome. Likewise, you should view yourself and other people around you as part of the machine of your organization. You need to define what roles you need, then put the best people in those roles.
(Shortform note: Designing the best team possible will usually mean promoting your subordinates into higher-level positions in which they can put their skills to the best use. However, be aware that newly promoted members in your team may struggle with their new roles due to the Peter Principle: the idea that people keep getting promoted due to their performance until they reach a level where they’re no longer competent. One way to increase the chances of success of newly promoted team members is to make sure they get the training and mentoring they need.)
To design the best team to make sure your organizational machine runs smoothly, Dalio gives the following tips:
First, hire managers who can help build the machine. Managers should also be good at what they’re managing, so they can intervene in case their reports aren’t doing well. They should have high standards so they can recognize problems.
(Shortform note: Aside from being good at what they’re managing and being good troubleshooters, managers should also be able to listen to team members and encourage everyone to participate in discussions.
Some people are visionaries who set big goals, some are designers who create the plan, some are taskmasters who make sure the plan gets implemented. Some can do multiple roles well, but no one can do them all well. Make each person’s responsibilities clear.
(Shortform note: Complementary strengths can make up for weaknesses, but make sure you avoid confusion and clashes (over priorities, for example) by fostering communication and trust.)
Reporting to two people, especially when across different departments, causes confusion, except when reporting to co-heads of the same department. Dalio says you should forbid asking people from other departments to do tasks for your department unless first approved by their manager.
(Shortform note: Some organizations have dotted-line reporting, meaning one individual reports directly to one boss while also performing tasks for another boss. If your organization has this structure, make sure that dual bosses are aligned and collaborative to minimize confusion for team members.)
Dalio says that the ideal manager to direct report ratio ranges from 1:5 to 1:10.
(Shortform note: Experts say that the number of direct reports depends on different factors like how complex the work is, the skill level of employees, and the manager’s experience.)
Allow escalation—or passing tasks on to someone else—when people can’t handle their responsibilities. Dalio says you shouldn’t treat this as a failure, but rather a responsibility.
(Shortform note: If a team member is overburdened, you can go through their daily task list with them, then determine which tasks should be prioritized.)
Prevent key man risk, or relying on just one or a few individuals, by training the next generation of leaders. Whether it’s on a team level or organizational level, build a machine that can work well without you. Dalio says there are three things you can do: First, have at least one person who can replace each key person, just as you have backup parts for machines. Second, expose the next generation of leaders to the thinking and decision-making of current leaders. Third, have the successors do aspects of their managers’ jobs for a while to get vetted. Beware of people who don’t cultivate their successors—they likely want to hold onto power and want their subordinates to stay dependent.
(Shortform note: If a complementary leader is set to take over another role—for example, a COO who’s being groomed to be the CEO—make the succession process as smooth as possible by gradually transferring responsibilities. Another option is to “role-swap,” or allow the COO to retain their responsibilities under the title of CEO, while having the new COO take over complementary tasks.)
Try to view yourself as a machine in order to unemotionally see what needs improvement.
As a machine, what are your desired outputs? What are the inputs that the machine uses to create the outputs?
What is currently most broken about you as a machine? How can you tell it’s broken?
How can you best fix this machine so that it operates more to your liking?
As mentioned earlier, Dalio says that people are one of the most important components of your organizational machine. He believes that people shape an organization’s culture, and thus the WHO of your organization is more important than the WHAT driving it. Rather than focusing on what should be done, you should focus on finding the best person to figure out what should be done in the first place.
(Shortform note: One helpful exercise is to change your line of thinking from, “How can I accomplish this goal?” to “Who can help me accomplish this goal?” In Who, Not How, author Dan Sullivan says that getting the right people to help you accomplish something saves you time and effort because it allows you to make use of skill sets and ideas that you may not have. Once you have the right people in place, you should clearly define your desired outcome, and then step back and allow them to figure out how to achieve it.)
In this section, Dalio details the principles for hiring, training, and evaluating the who.
Dalio says that a key part of working with others and being totally receptive is figuring out how you all behave and think differently. These differences are a result of genetics and environment and may lead to people having trouble understanding each other. For example, abstract thinkers may think literal people have no imagination. Literal people may think abstract people are pedantic philosophers.
It’s hard enough to know what type of person everyone else is. Compounding this problem is the fact that people often don’t know which type of person they are themselves. Dalio says that this leads to all sorts of misunderstandings and conflicts.
(Shortform note: Aside from knowing the personality of each person on your team, it’s also useful to know how they relate with other people. Relational skills aren’t just for those in human resources or sales—knowing your team members’ interpersonal strengths can boost your team’s productivity. By determining their ability to influence, connect with, and lead others, you can assign job responsibilities that play to their strengths and have a better idea of how you can help them set career goals.)
To avoid misunderstandings and be productive, Dalio says that you must figure out how people on your team think and behave. To this end, you should keep two things in mind: Be curious, and understand everyone’s strengths and weaknesses.
Dalio says you should want to understand how people who see things differently came to see them that way. Instead of getting frustrated with people and the choices they make, realize they aren’t intentionally acting in a counterproductive way—they’re simply making the best decisions based on how their brains work.
(Shortform note: One way to understand where another person is coming from is through a psychotherapeutic technique called role reversal: Two people exchange roles so that they can see things from a different perspective. However, it isn’t practical to use this technique in every situation, so you may borrow a technique from the book Radical Acceptance: Practice compassion and simply put yourself in the other person’s shoes and imagine what they need.)
This includes understanding your own strengths and weaknesses. Dalio says that people with complementary strengths do better work together than separately, leading to the best results. For example, a visionary and an executor can accomplish more together than each can individually.
(Shortform note: Not a lot of companies have personality profiles like Bridgewater’s to show people’s strengths and weaknesses, so you might need to be more deliberate about gaining a better understanding of your team members. In Inspired, author Marty Cagan recommends keeping teams together over several projects so that you, and they, can better gauge what each person brings to the table.)
To get an objective picture of what people are like, Bridgewater uses personality assessments like the Myers-Briggs Type Indicator, which classifies people into 16 personality types, and the Workplace Personality Inventory, which gauges attributes like persistence, stress tolerance, and analytical thinking. The results of the assessments reveal a combination of specific attributes, which then allows Bridgewater to form an archetype about a person. Dalio emphasizes that the archetypes aren’t precise, but they’re helpful for better understanding each individual.
(Shortform note: The archetypes at Bridgewater are divided into: Leaders (Commander, Shaper, Quiet Leader), Advocates (Inspirer, Campaigner, Coach), Enthusiasts (Promoter, Impresario, Entertainer), Givers (Peacekeeper, Problem Solver, Helper), Architects (Strategist, Planner, Orchestrator), Producers (Implementer, Investigator, Technician), Creators (Adventurer, Artisan, Inventor), Seekers (Explorer, Thinker, Growth Seeker), and Fighters (Protector, Enforcer, Critic). Dalio considers himself a Shaper.)
The assessments help give a clear narrative of how someone will behave and fit into a team. For example, a person might have a Myers-Briggs type of S (for Sensing, meaning more concerned with concrete details) and a J (for Judging, meaning more structured and orderly), plus an “executor” archetype, making them best suited for the conscientious execution of detailed plans.
Dalio writes that these assessments have proven to be so useful that he’s been adapting them to better suit Bridgewater’s recruitment and management practices.
(Shortform note: Dalio launched PrinciplesYou, a free personality assessment in 2021. The results of the test give you a glimpse of your archetypes and core traits, which builds your self-awareness—a crucial factor for success. Sharing the results with friends, family, and colleagues can also help you improve your relationships. Alongside this individual assessment, Dalio also launched PrinciplesUs, a people management tool for businesses.)
Having a better understanding of yourself and others helps you form a dream team of people with complementary strengths. In this chapter, Dalio shares his principles for hiring the right people, and how to train and evaluate them.
According to Dalio, the penalties for hiring the wrong person are huge. You can waste years on entertaining a bad hire, and may spend a lot of money on training and retraining. The graver hidden costs are a loss of morale among competent team members and a sense of diminishing standards that will progressively cripple the company. The importance of hiring is even greater when you choose people who operate at the highest levels, who are responsible for designing the machine and goals of the organization.
Dalio stresses that it’s important to hire people who have both great character and great capabilities; one without the other is dangerous. People with great capabilities who do not have great character will not be aligned on the mission, and they’ll work on their own goals, which may conflict with the organization’s. People with great character without great capabilities are pleasant to be around, but they don’t contribute to the organization’s goals. To Dalio, people who have both character and capabilities are rare and valuable.
Make the Most of Your Hiring Resources
Hiring right can be tricky, but you have two main tools to help you find the person with the right character and capabilities for a role: the interview and references. The interview gives you an idea of an applicant’s fit based on their self-assessment, while references enable you to verify the information you got from the interview.
In High Output Management, former Intel CEO Andrew Grove gives tips on how to make the most of these two resources:
The Interview
Assess the candidate’s technical skill level, ability to apply those skills, discrepancy between knowledge and performance, and values.
Allow the candidate to talk 80% of the time, but interrupt when they go off-tangent so that you don’t waste time.
Clarify any jargon that you might be using.
Give the candidate a realistic glimpse into the company—you don’t want them to feel like they were tricked.
References
Try to form a connection with the reference to make them feel more at ease about talking to you before diving into your questions.
Aim to get the same information (skills, application of skills, values) from the reference’s perspective.
As with most things, Dalio recommends designing a hiring machine to increase your chances of getting the best people for the job. He shares his principles for determining your organization’s personnel needs, interviewing people, and evaluating them for fit.
Dalio says the first thing you should do is create a clear mental image of the values, abilities, and skills (in that order) required for each person in the role to do their job well. Make a spec sheet with the criteria that you are looking for, encompassing:
Dalio warns that you shouldn’t design jobs to fit certain people. You may have favorite candidates in your team and be tempted to fit the role for what they’re good at, but this is counter-productive, since the best candidate may come from outside.
(Shortform note: Dalio says that you should consider values, abilities, and skills when looking for the right person for the job, but he leaves out one factor that some consider to be the most important: attitude. Some experts even say that you should hire for attitude and train for skill, because someone who’s motivated to keep learning, who knows how to handle feedback and failure, and who works well with others has a greater chance for success than someone who just has technical skills. However, you should keep in mind that hiring for attitude comes with risks—you may not get an accurate picture during the screening process since candidates put their best foot forward, and training in areas like problem-solving and critical thinking may take longer than expected.)
Once you’re clear about the kind of person you need for a role, it’s time to interview applicants. Dalio says that most organizations hire someone by asking semi-random questions and then choosing based on how much the interviewer liked the person. This is prone to error because it’s based on inconsistent, subjective evaluations. To build a more objective interview process, Dalio thus recommends the following:
Think through what questions will be asked, and how different answers differentiate candidates of different qualities. Save candidates’ answers and compare them against successful candidates’ performance data later on so you can tell how predictive questions are of certain behaviors. (Shortform note: Ask out-of-the-box questions to get candidates to veer away from rehearsed answers and get them to reveal their real personality and thought process.)
Choose interviewers who embody the qualities and abilities you’re hiring for. People tend to pick those who are similar to themselves. If you’re looking for someone highly detail-oriented who’s good at execution, ask someone on your team who has those qualities to conduct the interview. (Shortform note: This tactic may lead to a biased hiring committee. Reduce the chances of forming a homogeneous team by asking interviewers to assess their unconscious biases, and make sure you have a diverse hiring committee.)
Consider using personality assessments to know more about a candidate. (Shortform note: Another way to learn more about a candidate is to assign homework—an essay, proposal, or presentation. This allows you to better gauge the quality of their work.)
Look for exceptional people. Dalio says that if you aren’t excited by a candidate, you shouldn’t hire them. Great candidates have demonstrated themselves to be extraordinary in some way, so look at their track records. Also consider the candidate’s potential for growth—you want someone who can evolve with the organization and whom you want to work with for a long time.
(Shortform note: One of the advantages of promoting someone from within, rather than hiring from outside, is that you already know their track record. You’re also assured that they already have a deep understanding of the organization’s culture—especially important if you’re looking to fill a leadership position.
You can’t attract exceptional talent with an organization’s culture alone—people need to get paid for their work. Dalio provides several pieces of advice on offering competitive compensation:
Pay north of fair. People perform better when they don’t have to worry about money. Dalio says you should pay them enough to meet their needs, but not so much that they become complacent. They shouldn’t come to you just for job security; they should also be motivated to earn more money through good work.
(Shortform note: Highly competitive salaries are not just good for the employees, but also for the company, as demonstrated by Gravity Payments. When CEO Dan Price realized that his employees were struggling to make ends meet and therefore under a lot of stress, he increased the minimum wage at his company to $70,000 a year. Interestingly, this increase didn’t eat into the company’s profits, and instead resulted in revenue growth at double the previous rate—an indication that increasing employees’ financial security leads to increased productivity.)
Determine baseline compensation by knowing the market rate for a person with similar skills (not just the same job title). Then, build in incentives based on performance metrics so they’re motivated to outperform.
(Shortform note: Some say that an incentive system isn’t the best way to go. In Drive, author Daniel H. Pink argues that rewards can actually increase bad behavior because it promotes cheating, creates addiction, and encourages short-term thinking. However, Pink ignores the vast literature on the benefits of incentives.)
Be generous, but within reason. Dalio says that being generous does not necessitate total fairness or entitlement. In general, people should be happy with what they get, and not point to what other people get as justification for getting the same thing.
(Shortform note: Not being “totally fair” has led to some compensation issues for Bridgewater. In 2020, Bridgewater co-CEO Eileen Murray left the firm and filed a lawsuit for gender discrimination and unequal pay. Murray and Bridgewater eventually reached an “amicable” agreement. A few months later, the Wall Street Journal reported that Karen Karniol-Tambour, the top-ranked woman at Bridgewater, had filed a formal complaint with top management, claiming that she was paid less than men who had similar or lesser responsibilities. However, Karniol-Tambour later issued a statement to dispute this, saying the report was inaccurate and discussions about her compensation did not involve gender.)
Even if you have a good system, the right interview questions, and competitive compensation, you’ll still run into problems. Dalio says to keep the following in mind during the hiring process:
Don’t take references for granted. Candidates tend to exaggerate accomplishments, so talk to someone who can give you a clear picture of the candidate’s previous performance. (Shortform note: When talking to references, describe the candidate’s potential role and its challenges, then ask the reference how the candidate performed in similar situations.)
Don’t rely on grades and honors. Dalio says that success in school is a limited gauge of certain attributes: memory and processing speed, determination to succeed, willingness to follow directions. Success in school does not necessarily correlate with common sense, vision, and creativity. (Shortform: Based on a survey, some companies put college GPA near the bottom of the list of important attributes for recent graduates. Instead, they consider internships and work experience during college to be more valuable.)
Beware the “impractical idealist” type—Dalio says these people don’t execute practical plans that produce results. (Shortform note: Dalio doesn’t go into great detail about impractical idealists, but in a series of tweets, he describes them as those who have theories about the right course of action without having any realistic idea of what it entails because they’ve never done it.)
Be careful about outsourcing. Consultants are helpful for one-time specialized tasks, but beware of outsourcing work your employees should be doing. Dalio also warns that consultants can ultimately cost more and cause greater security risks than employees. (Shortform note: Some of the areas that may require the help of a consultant are process improvements, expertise in a specific field for a project, or the implementation of major changes like cost-cutting.)
Once you’ve hired the right people, you can focus your attention on training them, evaluating how they’re doing, and deciding what to do with them based on their performance. Dalio gives specific tips for each part of the process.
The training process can tell you if the person you hired is a good fit for the job. Dalio says it generally takes six to 12 months to get to know an employee’s strengths and weaknesses and their preferences for work. Here are his guidelines for making the most out of this period:
That way, you can hold people accountable and gauge whether they performed poorly due to unclear or unmet expectations.
(Shortform note: If you’re chronically unhappy with your team’s performance and believe that they don’t meet your expectations, evaluate whether your expectations are unreasonable. While you should hold people to a high standard, you shouldn’t hold out for perfection.)
As you learn more about the trainee, they should get new assignments tailored to their strengths, weaknesses, and preferences.
(Shortform note: To make sure that you’re setting them up for success, provide all the resources they need to do each new assignment well.)
Don’t dictate what people should do. Instead, Dalio says, train them and give your input, but let them make decisions on their own. If you find that micromanaging them is necessary, then it may be a sign that you hired the wrong person.
(Shortform note: You may also need to reflect on your need to micromanage—it might not be because of the person’s lack of ability but because of your fear of failure. Remember that your job as a manager isn’t to keep people from taking risks and failing, but to create a workplace where they can fail and learn from their mistakes.)
Feedback is a key component of Dalio’s principle of extreme honesty. You should constantly deliver feedback throughout the training period and beyond, because it allows a person to recalibrate if they’re missing the mark. However, it can be painful for the recipient to hear. Thus, he gives the following tips to make delivering feedback a more objective, straightforward process:
Look for patterns, then build up to a larger picture.
(Shortform note: Some people might refuse to acknowledge that they have areas for improvement—these specific data points prepare you to give concrete examples and evidence to back up your assessment.)
When giving feedback, ask the recipient to focus on whether the feedback is true, rather than the implications of that feedback (such as whether they’ll be demoted). Ask, “Does this feedback sound accurate to you?” Dalio says you can use this to learn about them and discover primary sources of their issues together.
(Shortform note: While getting employees’ feedback during the process is a good practice, Andrew Grove cautions against asking them for a self-review. In High Output Management, he writes that this might make them feel like you weren’t paying attention to their work.)
Reflect on what is succeeding and not succeeding, but stay focused on the actual situation. If things are going poorly, don’t feel obligated to balance compliments and criticisms for the sake of being nice. Dalio tends to avoid celebrating how great people are and instead focuses on where they need to improve.
(Shortform note: When assessing their performance, avoid giving vague, generalized feedback and instead give more specific comments so they know exactly what’s working and what’s not. For example, instead of saying, “Your presentations need work,” you should say, “You can improve your presentations by shortening the bullet points and adding year-on-year graphs.”)
If communicating a weakness or mistake, put it into the context of the person’s total evaluation. Dalio says that a glancing comment from a superior could make someone afraid of being fired.
(Shortform note: Take care not to fall into the other extreme: the “feedback sandwich,” where you try to soften the blow of negative feedback by delivering it in the middle of positive feedback. Instead, communicate your good intentions behind giving the feedback, which is to help them improve.)
Remind the person receiving feedback that accuracy and kindness are the same thing. Dalio re-emphasizes that pain is a signal for reflection and finding the truth, and that the truth is more important to meeting their goals and becoming successful than satisfying their ego.
(Shortform note: In Dare to Lead, Brené Brown similarly stresses that giving polite, dishonest feedback is unfair and unkind, because people don’t know they need to improve and yet are expected to improve.)
Let them see their failures so clearly that they are motivated to change them. (Shortform note: Employees may react emotionally to a clear explanation of their failures and may not be able to properly process information during an in-person discussion, so consider giving them a written review ahead of time.)
Performance evaluations help you determine if a person is a good fit for the job. Keep in mind that it’s not just for new hires but also for experienced employees. Dalio gives the following tips for evaluating people:
Don’t be overconfident about your assessments. Whether you’re evaluating a trainee or an experienced employee, it’s best to triangulate your view with other people.
(Shortform note: This aligns with one of the rising trends in performance evaluations: the socially-based feedback system. In this system, employees receive comprehensive feedback from colleagues, peers, and other managers, instead of relying on feedback from one boss.)
Review goals, tasks, and responsibilities at least once a quarter. Dalio stresses that periodic performance reviews should contain few surprises—you should deliver feedback continuously so that people know where they stand.
(Shortform note: Consider implementing peer reviews instead of the traditional manager-led performance reviews Dalio suggests. Also called 360 reviews, peer reviews gather feedback from a larger group of colleagues to paint a more well-rounded picture of an employee’s performance.)
Define the most critical metrics, and have the discipline to check them regularly. Even better, tie the metrics formulaically to predetermined consequences (like bonuses).
(Shortform note: Some argue that bonuses aren’t ideal because they may not work on individuals who aren’t interested in the specific rewards, encourages unethical behavior, and corrodes teamwork, among other reasons. In Carrots and Sticks Don’t Work, author Paul Marciano says you can better motivate people through a system of respect, empowerment, supportive feedback, partnering, expectations, consideration, and trust.)
This means holding all employees to the same standards, whether they’re strong performers or not. It also means giving credit where it’s due, and giving the harshest feedback to those in the wrong instead of diluting the feedback by spreading the blame.
(Shortform note: Half of executives in a survey don’t believe in the efficacy of evaluation systems because they perceive a lack of fairness. You can increase fairness by being clear about how employees’ work fits into the organization’s priorities, coaching employees through meaningful discussions, and saving big rewards for the top 20% of workers who typically contribute 80% of the value.)
Often, people get a poor evaluation because they produce poor outcomes. However, Dalio says you should look at more than just outcomes and consider how people got there. They may have ended up with poor outcomes due to circumstances they couldn’t control, despite doing everything right and having sound reasoning behind their decisions.
Dalio’s tactic is to ask probing questions to assess people’s thinking. If he finds that their way of thinking repeatedly leads to poor outcomes over time, he considers if their weaknesses are trainable.
(Shortform note: It’s thus important to clarify your expectations of employees when it comes to both their results and their behavior. If you focus solely on results, then employees might engage in unacceptable behavior as long as they produce good outcomes. For example, Wells Fargo employees resorted to fraud just so they could meet their sales goals.)
More people than you think will cheat if given the opportunity. You can audit or investigate people, explaining why you’re doing this, and they shouldn’t take this personally as a lack of trust but as just part of checks and balances. Dalio adds that auditors’ procedures shouldn’t be known to those being audited, and auditors themselves should be audited. If you find a rule violation, use “public hangings” to deter future bad behavior.
How Do You Check the Behavior of Remote Workers?
Having remote or hybrid work setups makes it harder to keep an eye on employees’ behavior. There are tools to monitor employees working out of office, but close surveillance may erode trust, increase stress, and decrease productivity.
If you must monitor your remote workers, keep these five tips in mind:
Discuss appropriate metrics with workers, and track only what’s necessary.
Show respect and foster trust by being honest about what you’re monitoring and why.
Realize that employees are human, and that even high performers can have days that aren’t particularly productive.
Be fair—the rules that apply to junior employees should also apply to more senior ones.
Pull back when you recognize that some areas can do with less surveillance.
After evaluating employees’ performance, you need to decide how to move forward. Dalio gives guidelines for what to do depending on the results of the evaluation.
Some people are just not suited for the jobs they were hired for. Keeping them in those jobs is toxic to the entire system. Not only does it compromise meritocracy and lower morale, but it also holds back the person’s personal evolution—you prevent them from discovering another way they could contribute to your organization or another. In this case, Dalio says you should:
It can be due to design problems in the machine (such as giving someone too many responsibilities), lack of training, lack of abilities, or lack of values. If it’s a lack of skills or training, consider adding guardrails: structures that help people stay on course, such as team members who have the strengths to compensate for others’ weaknesses. If the problem is a lack of values or abilities, don’t rehabilitate them—Dalio says that values and abilities don’t change much. (Shortform note: If you find that the cause of the failure can’t be rehabilitated and that you’ll have to let someone go, take swift action. Dragging it out sends a signal to your team that you can’t make tough decisions.)
Figure out whether the person is a better fit for another job in the organization. But be careful—understand why they failed, and make sure this won’t happen again in the new job. (Shortform note: If you’re considering an internal transfer for an underperforming employee, communicate that your goal is to help them make use of untapped skills and to help them reach their full potential—but, make sure those untapped skills actually exist. Otherwise, the employee just becomes someone else’s problem.)
If the person is failing in a role they were promoted to, Dalio cautions against letting them step back into their previous role. The person may resent being demoted to a job they probably can’t advance beyond. It may be better for them to start anew elsewhere. It’s hard to fire people you like and care about, but it’s necessary for the good of the organization.
Is Demotion Ever a Good Idea?
While Dalio says you should beware of demoting people, there are two situations where a demotion might work:
A high performer doesn’t translate their performance into a managerial role. You might promote a strong individual contributor without considering if their skills translate well into management. If you see them struggling, try training them first. If you don’t see any improvement, consider restoring them to their previous role where they were able to make good contributions.
The employee has skills that don’t match their current role. For example, a salesperson with weak interpersonal skills but strong technological know-how might do better if they step down to a sales support role.
As Dalio says, an employee may resent getting demoted, so handle it with care: Say that the organization would like to offer them a position that’s better suited to their skills, let them know that you want them to stay, and map out a more viable career plan for them.
Great people with great values and capabilities are rare. Dalio doesn’t offer detailed tips for managing these people. He only says that you should think about how to keep them and encourage them to speak up about how things are going.
(Shortform note: Companies that find ways to recognize high performers have a turnover rate that’s 31% lower than “low-recognition” companies. In Measure What Matters, venture capitalist John Doerr writes that you can establish a “high-recognition” culture by introducing a peer-to-peer recognition system, where employees can show their appreciation for their colleagues. For example, you can allot time during weekly meetings for employees to recognize colleagues who did good work. You can also use the company newsletter to tell stories of how people contributed to achieving the company’s goals.)
Carefully selecting team members who complement each other doesn’t mean there won’t be any challenges. Everyone has different personalities, perspectives, and styles of working, so it’s only natural to have misunderstandings and disagreements. In this chapter, we condense Dalio’s principles for managing teams so that team members stay aligned (or, as Dalio says, “stay in sync”) and make decisions more efficiently.
How to Stay Aligned in a Hybrid Work Environment
With the rise of hybrid work setups, it may be more challenging for teams to stay in sync. Keep the following alignment tips in mind when some team members work at home and others work at the office:
Check your biases. You may have unintentional proximity bias, thinking those in the office are more productive than those working from home. Being aware of this tendency can help you safeguard against it.
Keep interactions on even footing. While the workplace may be hybrid, your meetings shouldn’t be. Have meetings with everyone in one place or with everyone on video call, regardless of location.
Keep everyone in the loop. Communicate priorities, deliverables, and changes to remote workers in a timely manner.
Stay in touch. Check in with all team members, keep an eye out for individuals who may feel alienated, and find ways to keep the team connected.
Dalio says that people can disagree on many things, and resolving every disagreement would require a lot of time and effort. To be more efficient, he advises making a list of disagreements, going down the list, and eliminating unimportant disagreements such as complaining from people who are close-minded.
(Shortform note: Dalio doesn’t elaborate on what makes a disagreement “legitimate” or not. As a general rule of thumb, a disagreement is worth your time and attention if the dissenting opinion is specific, objective (rather than a personal attack), and focused on the future—it’s concerned with outcomes rather than something that happened in the past. Otherwise, it’s likely just an empty complaint.)
Prioritize the most important issues with the most credible parties, then practice both open-mindedness and assertiveness to come to a resolution.
Dalio says you must see things through the other person’s eyes while communicating clearly how you see things. Most people find it easier to be assertive and share how they see things than to empathize with the other person. If you have overly assertive people on the team, remind them that the real winners are those who can change their minds, since they learn something.
On the other hand, other people are not assertive enough, and they’re too willing to accept others’ conclusions. Remember that hiding viewpoints hampers you from getting the best ideas possible, since not all ideas are laid on the table. Thus, Dalio explains, those in disagreement need to strike the right balance when it comes to assertiveness in order to come to a satisfying resolution.
How Women Can Manage the Assertiveness Double-Bind
Dalio encourages assertiveness for everyone, but he doesn’t acknowledge that in many workplaces, women who are assertive are still viewed in a negative light. This is because women are expected to demonstrate gender-normative characteristics like warmth and submissiveness, which run counter to typical “masculine” leadership characteristics like assertiveness and competitiveness.
While the ideal scenario would be a cultural shift so that women aren’t judged differently for displaying stereotypically masculine behavior, current societal norms mean that women still need to find ways to get around unfair expectations. Here are some ways women can be more assertive without backlash:
Strike a balance between assertiveness and warmth. Start and end emails on a friendly note while clearly communicating your message. Avoid using words like “maybe” and “sorry,” which may suggest weakness.
Frame your statements with a behavior phrase (“I’ll be as direct as possible”), a value phrase (“It’s important for me to be honest about this”), or an inoculation phrase (“I know I may be seen as disagreeable, but I’m going to be very direct”).
Subtly establish dominance. Certain poses like putting hands on your hips and standing tall, and behaviors like speaking in a loud voice can make you appear dominant without the negative implications of speaking assertively.
Keep it short. Women who talk lengthily are seen as less competent than their male counterparts.
When other people are assertive, it may rub you the wrong way. Dalio says that your ego might confuse suggestions and questions with criticisms. He notes that there’s a difference between someone telling you to “keep your eye on the speed limit” and someone saying, “You’re driving recklessly and ignoring the speed limit.”
(Shortform note: To keep yourself from taking things personally, take some time to understand the other person’s issues—for example, perhaps they believe they’ll only be heard if they speak aggressively.)
Effectively navigate disagreements with the following conversation tips from Dalio:
Start by assuming you’re not communicating or listening well, rather than blaming the other party. (Shortform note: You might find that in order to reduce conflict, you have to adjust your communication style to who you’re talking to. In The Four Tendencies, Gretchen Rubin lists some general rules for conversing with different personality types: Upholders want to know what needs to be done, questioners want to know why something needs to be done, obligers want to be held accountable for what needs to be done, and rebels need to know that they have a choice.)
Listen properly. This means repeating what you’re hearing to make sure you understand, whether it’s a question or a statement. If someone keeps getting interrupted, Dalio says you should use the two-minute rule: Give each person two minutes to explain their reasoning completely. If either party is too emotional to be logical, defer the conversation by a few hours or days. (Shortform note: Many people think good listeners don’t interrupt and simply repeat what the other person says, but research suggests that this isn’t the case. More than absorbing information, good listeners amplify what the other person says, provide constructive feedback, and energize the conversation.)
Ground them in facts. If someone says “I feel like [X] is true,” ask them, “Is it true? How do you know?” (Shortform note: Keep yourself grounded in facts by managing your emotions. Take a deep breath, and have a go-to mantra to help you stay calm.)
End the conversation and move forward. State the conclusions. If there isn’t an agreement, say so; if there is further action, make a to-do list, and assign people tasks with specific deadlines. Then, share the conclusions via email or recordings. (Shortform note: Author Kim Scott ends conversations at the right time and keeps things moving forward by making sure that debates and decisions don’t take place in one meeting. In Radical Candor, she writes that decision-making requires that you first have a debate meeting to give everyone involved a full understanding of the matter. Then, have a separate decision meeting to signal that debating is over and that it’s time to make decisions and delegate tasks.)
Aside from disagreements, meetings can also take up a lot of your team’s time. Dalio shares his tips for making meetings more effective and efficient:
Can This Meeting Be an Email?
Clarifying the purpose of a meeting, limiting participation, keeping discussions on track, and having a standard agenda as Dalio advises can help streamline meetings. However, some meetings may be unnecessary, no matter how efficient they are. Dalio doesn’t say how you should move forward if people are disagreeing on the necessity of a meeting. To decide if you should call an in-person meeting or just send an email, ask the following questions:
Are emotions running high? With emails, we find it difficult to gauge tone, tend to assume negative intentions, and do a lot of guesswork when it comes to context. Opt for a face-to-face meeting when things are getting heated.
What is the purpose? Email is for communicating information; meetings are for solving problems.
What can make us feel more connected? Consider which option would strengthen your relationships with your co-workers. Sometimes a funny note may be enough.
How complex is the topic? Meetings may be more ideal for topics that have a lot of important details or involve a lot of people.
Dalio believes that a key component of team-building is to treat people like partners or extended family, because this makes relationships more special than quid pro quo employment agreements. When people have a common mission, they struggle well together, and they help each other evolve. However, Dalio notes that even though Bridgewater is akin to a family business, the “family members” can still be let go if they don’t perform excellently.
(Shortform note: Some experts disagree with Dalio, arguing that treating employees like family can backfire. Firing “family” seems hypocritical, and an organization requires good leadership, not parenting. Instead, they say, it might be better to view your organization as a sports team, where there are clear goals, roles, and expectations.)
Dalio gives some tips for cultivating meaningful relationships in the workplace:
Expect your team to think like owners, and to behave accordingly. This helps people uphold their responsibilities, such as making sure things are taken care of when they’re on vacation, and spending company money like it’s their own. (Shortform note: In Multipliers, authors Liz Wiseman and Greg McKeown say you can increase employees’ sense of ownership by putting them in charge of projects and letting them handle small issues without your help. This makes them responsible for the results of a project and gives them challenges that force them to learn new things.)
Fund ways for people to build relationships with each other. Pay for half of the activities people want to do together, and pay for food and drink at hosted dinners. (Shortform note: You can even help people form connections in a remote working environment by having Zoom rooms or Slack channels where people can have non-work discussions.)
Accept that some people will not buy into the culture. Dalio claims that these team members can still contribute a lot and be considerate. (Shortform note: In contrast, some argue that not buying into the culture is a red flag. In Radical Candor, Kim Scott explains that those with a poor cultural fit will constantly be at odds with their colleagues, so it’s best if they leave the organization.)
Treasure honorable people who behave well even when you’re not looking. Dalio believes that most people will pretend to operate in your best interest while operating in their own, so those with integrity are exceptionally valuable. (Shortform note: While you should treasure good people, it’s also important to set boundaries with them. If your professional relationship with an employee develops into a friendship, remind them that there may be information you can’t share with them, and establish ground rules about conversations outside the workplace.)
Understand yourself and other people to form a dream team that can effectively work through disagreements and blind spots.
Think of someone whom you disagree with often. What are they blind to that you see often?
Imagine that they are actually literally blind to that thing that you notice. Does this help you understand their thinking? Does it make your disagreements less frustrating?
What do you tend to be blind to? What do other people point out that you tend not to see?
If you’re not sure what your blind spots are, who could you ask who would give you an honest, objective opinion?
If you were forming a team, who can complement you based on what you’re blind to?
This chapter brings together the previous principles of total receptivity, honesty, transparency, productive conflict, letting the best ideas win regardless of source, a systematic approach, and the right people into a process that helps you arrive at the best decisions.
While each situation has unique particularities, Dalio describes general principles for any decision. He writes that there are only two main steps to making a decision: learning and deciding. We’ll explore each of these in detail in this chapter.
Dalio says that the foundation of decision-making is gathering information from credible sources. To do this, you need to be receptive and open to productive conflict (both of which were discussed in previous chapters).
To make sense of all the information you receive, you should use each piece of information appropriately. Dalio says you shouldn’t treat all information equally, because some information is more important than others, and some people are more credible than others in a given topic area. You also shouldn’t mistake opinions for facts.
(Shortform note: When you receive an overwhelming amount of information, it can be hard to tell which pieces of information are more important than others. Try to filter everything using a hierarchy of knowledge: first, your gut instincts or intuition, which you might need to trust even in the face of data; second, information, or your collection of data; and third, knowledge, or the information after analyzing data.)
Dalio says that any important decisions you make for a situation should put you on an upward trajectory at the right pace, so that you can reach your goals within a reasonable amount of time. To make those decisions, you should have a good understanding of the situation, with a clear view of the factors and realities at play. This means you need to:
Compare your overview against your desired trajectory. Some people make the mistake of just looking at what’s currently happening without considering the context, and then making decisions from there. This leads to poor outcomes.
For example, you might look at rising sales figures and think that you’re doing great, and consequently decide to keep doing what you’ve been doing. On the other hand, if you look at your performance over time and compare it against your ideal trajectory, you might see that sales are rising too slowly to make a significant impact. This discovery should lead to a different decision altogether.
(Shortform note: Aside from taking a big-picture view of your metrics, you might also need to reevaluate them to see if they’re measuring anything meaningful. Check if you’re mistakenly using vanity metrics, or numbers that look great on paper but that don’t really do anything for your organization.)
Dalio says that reality isn’t just a random pile of facts. Instead, it’s made up of interconnected levels of detail with a greater logic: There is a top level of the most important points, as well as lower levels of supporting detail. You need to be clear about the level you’re deciding on and understand that the decision should be consistent across all levels.
For example, if you’re deciding to start a small business, your levels might be:
If you make a decision to put little effort into getting good grades, it will naturally affect the levels above it. You can’t make a different decision at Level 5 and expect nothing to change in the higher levels.
(Shortform note: Just because decision-making has levels, it doesn’t mean that the process is linear, where you simply make changes at one level and then move on to the next. Instead, decision-making is a circular process: As you obtain new information, you have to circle back and compare it against the information you already have, and analyze this old information through a new lens. For example, when deciding on a university, you don’t just look at one school and make a decision. You explore various universities to adequately compare them and find the best fit based on your objectives, capabilities, and resources.)
Looking at each situation from different levels can be time-consuming, but you can use what Dalio calls a “by and large” approach: Don’t get obsessed with details that don’t really matter and lose sight of what’s really important. Informed approximations can already lead to effective decisions.
(Shortform note: In a review of Principles, The Wall Street Journal calls attention to the contradictions in the book, including how Dalio advocates focusing on the details while also championing being imprecise (or using the “by and large” approach). You can reconcile these two principles by focusing on important details and not getting caught up in irrelevant ones.)
Once you’ve gathered relevant information from credible sources, you can make a decision. Dalio outlines five principles for making good decisions:
Dalio believes that what hurts good decision-making the most is emotions, so it’s best to automate decisions as much as you can. This means using the same timeless and universal principles to decide on situations that fall within the same category.
Ideally, you can convert your principles into algorithms and have a computer decide alongside you. Here’s how:
(Shortform note: If it’s unclear what algorithms are, think of an “if-then” statement. For example, “If I receive enough money to pay my bills, I will save 20% of what remains in my retirement account. If I don’t, I will pay my highest interest bills first, then try to cut down my spending.” Having clear rules like this gives you an easy way to make decisions without thinking hard, from scratch, each time.)
If the rules and algorithms you use for decision-making lead to the wrong output, Dalio explains, the weightings or rules need to be changed. (Shortform note: For example, think of how you spend your time. Is your time optimally allocated among the activities that will help you best meet your goals? If not, then what is causing you to spend your time this way? Designing the rules that govern how you spend your time will improve how your machine works.)
Sometimes it appears you only have a choice between two difficult options, or they each trade off something that is unnegotiable. But as Dalio’s experience has shown, you don’t have to settle for either option and can instead look for a novel solution—for example, you can have a fund that has high returns and low risk.
(Shortform note: When presented with an option that doesn’t seem attractive, sometimes all you need to do is to look at it from a different angle—reframing might make that option more desirable. Research shows that when one scenario is presented in two different ways, people tend to go for the option that focuses on gains. For example, given a choice between a snack that’s 90% fat free and 10% fat, we’re more likely to choose the first option.)
Every action has a direct “first-order” consequence, as well as longer-term second- and third-order consequences. Dalio urges you to think of the consequences as a series of dominoes, one triggering another. Some of the hardest habits to adopt have painful short-term first-order consequences but fantastic second- and third-order consequences. Don’t let short-term first-order consequences deter you from reaching the real goals. It’s worth enduring the shorter-term pain for the longer-term gain.
How to Process Second-Order Consequences
You may ignore second-order consequences because you think they’re too unpredictable and too complicated. But using second-order thinking can keep you from making disastrous decisions. To help simplify the process, try asking yourself the following questions:
What are the different probable outcomes?
Which one is the most likely?
What are the chances that I’m right?
What do others think?
How does my thinking differ from theirs?
By “expected value calculations,” Dalio means assessing all your options to determine which gives you the highest expected value. Many people shy away from options that have possible downsides and take very safe options, even though the safe options don’t have the highest expected value. Don’t reject an option just because there’s something wrong with it—instead consider the gains.
How Successful Companies Make Value Calculations
Dalio believes it’s OK to take chances as long as you increase your chances of winning and your bets aren’t big enough to put the entire organization at risk. Other successful companies employ a similar tactic of taking calculated risks through a “bullets-before-cannonballs” approach. Jim Collins describes this approach in Great by Choice:
First, successful companies fire “bullets.” These are small-scale projects that serve as an experiment.
Then, they concentrate their firepower into “cannonballs.” Companies use data from the small-scale projects to tell them which ones have the biggest potential for success. Once they determine the bullets that hit the mark, the companies launch bigger-scale projects in the same direction.
In contrast, unsuccessful companies take an all-or-nothing approach, firing uncalibrated cannonballs that expose them to huge risks.
Dalio says that principles are the true basis for disagreements between people. Rather than argue about the conclusions both of you have, argue about the principles that each of you used to arrive at your conclusions. If both of you agree on the principles, then you should also agree on the decision.
(Shortform note: It can be argued that people who start from the same place can still arrive at different conclusions. One study found that 73 teams that tested the same hypothesis and started with the same data produced a wide range of conclusions. This demonstrates that analysis is a highly complex process that isn’t always as straightforward as just following the same principles, as Dalio suggests.)
Dalio writes that many leaders see disagreements as disloyalty and would rather people just follow orders. But great leaders prefer to have good challengers to stress-test their ideas. Being the only person thinking is not the optimal way to succeed. However, this can go the other way, with too many voices weighing in. Even if you use credibility-centered decision making (discussed in Part 1) to resolve disagreements, some lingering resentment may remain. Here’s how to deal with it:
Don’t leave important conflicts unresolved—escalate the conflict to a higher authority, or put it to a vote. (Shortform note: Generally, you should allow employees to deal with disagreements on their own, but step in if it leads to changes in behavior, reduced productivity, and increased stress.)
Don’t let little disagreements divide you when big agreements should bring you together. Use the “by and large” approach—overall, you have good relationships, so don’t focus on inconsequential details. (Shortform note: Sometimes, not having disagreements can be divisive, because it might mean people are avoiding difficult topics. According to The Five Dysfunctions of a Team, this artificial harmony may signal a lack of trust and may lead to problems like wrong decisions, passive-aggressive behavior, or unresolved issues.)
Dalio believes that every event has happened before, so you can make predictions and plans based on the past. In the same way, disagreements that happen have likely happened before, so you can have procedures ready to resolve them. (Shortform note: An even better approach might be to go beyond conflict resolution and think about conflict prevention. Identify potential areas of conflict and intervene before they arise.)
Know when it’s time to stop debating and to move on. Get the big things right, and don’t worry about perfecting the small things. However, if you disagree on whether it’s important to debate something, it probably should be debated. (Shortform note: If you have a perfectionist on your team who can’t let things go, help them become more self-aware and understand how obsessing over small details can stymie both team and personal progress.)
After the discussion has ended, Dalio says it’s time to collect the votes from everyone, then weigh each person’s vote by how credible they are regarding this decision. Compare the democratic equally weighted result with the credibility-centered vote. If the two align, then the answer is easy—you have a final decision, and you can move on. If the two disagree, then you should generally go with the credibility-centered vote. (Bridgewater has automated this process using an in-house app.)
Dalio says the vote is just a strong suggestion—the right to debate is not the same as the right to make decisions, and the meeting still has one person who’s ultimately responsible for making the final call. In some cases, this final decision-maker can override a credibility-centered vote, but should only do so when they can define specifically what they disagree with, explain their logic, and state that they understand the risks of being wrong.
If the decision you wanted isn’t what’s decided, you must support the decision. This signals that you believe in the validity of the system more than you care about getting your way. The success of the group is more important than your individual desire.
(Shortform note: While Dalio has a lengthy decision-making process, Malcolm Gladwell presents another way to go about it in Blink: making decisions in an instant using snap judgments. Snap judgments operate quickly, using patterns from previous experiences. You can improve your snap judgments by considering only the most essential information and preparing for situations that potentially require quick decisions.)
Potential Pitfalls of Shared Decision-Making
Getting more people to weigh in on decision-making can lead to greater insight, reveal blind spots, and lead to better decisions. However, such collaborative work can have two significant downsides:
Collaboration overload—research suggests that people spend around 80% of their time in collaborative activities, whether in meetings or attending to tasks other than their own. This leaves little time for critical individual work.
Uneven work distribution—research also shows that only three to 5% of employees contribute 20 to 35% of the value. (This may be the case for Bridgewater’s more credible employees.) These employees may become overloaded with requests from other people.
To avoid these pitfalls of collaboration, companies should recognize when collaboration is necessary, redistribute work to help ease the load of overburdened or more credible employees, and incentivize effective collaboration.
Many of the ideas Dalio discussed in previous chapters form the foundation for his process for achieving success in any context. This involves five steps:
Dalio says that these five steps form a loop. Once you complete one turn of the loop, you’ll then look at your results and use what you learned to go through the process again, setting new, higher goals.
(Shortform note: The downside of setting goals is that you spend a lot of time in a “failure state,” and you feel joy only fleetingly after achieving your goal. Thus, some experts recommend focusing more on the process and small wins rather than the ultimate goal. This is why Dalio’s process is so useful—it focuses on all the steps toward success and what you can gain at each stage.)
In this chapter, we’ll examine each of these five steps in depth and include how to apply them in the context of organizations.
Having a goal will keep you focused and give you a clear direction. If you don’t have a goal, you’ll likely wander aimlessly and never get anywhere.
When determining which goals to go after, Dalio cautions against mistaking goals for desires. He says that desires are typically first-order consequences that get in the way of reaching your goals. For example, your goal might be to save $100,000, but your desire might be to keep buying things you don’t need online.
To make sure that you go after the right goals, Dalio says you should:
Money is necessary and gives you security, but beyond covering the basics of a home, food, and relationships, Dalio believes that money doesn’t significantly improve your life. Thus, you shouldn’t set it as your ultimate goal. Instead, he recommends that you first think about your real non-monetary goals, then work your way backward to set specific monetary goals that will help you get there.
(Shortform note: You can also do it the other way around: First, make a list of what you would buy if you won the lottery. Once you run out of things to write, your mind will be clear enough to discover the things that really matter to you.)
When setting your non-monetary goals, Dalio urges you to be audacious. If you know with certainty you can achieve a goal, then you’re not aiming high enough. Believe that you can expand your current knowledge and find paths toward goals that seem unattainable.
(Shortform note: While Dalio advocates setting stretch goals, some experts warn that it can do more harm than good, leading employees to focus on the wrong things and to engage in unethical behavior. To avoid this, research suggests setting learning or mastery goals rather than performance goals.)
Balance the belief that you can have just about anything you want with the reality that you can’t have everything you want: Chasing too many goals at once spreads your attention and keeps you from achieving any of them, Dalio cautions. Don’t be afraid to reject good options to focus your pursuit on just the best ones.
(Shortform note: Staying focused on just a few audacious goals can help ensure long-term success. In Built to Last, Jim Collins and Jerry Porras write that one key behind the longevity of enduring companies is that they refuse to be complacent and commit to bold, risky goals that have a 50 to 70% chance of success.)
In your organization, staying focused means aligning your goals with your values, getting people to understand how their tasks and responsibilities are connected to the goals, and reviewing goals at least once a quarter to make sure you’re on track.
(Shortform note: Your employees need to understand how they contribute to your organization’s goals because having a sense of purpose is a stronger motivator than passion and pushes them to overcome obstacles. In The Power of Moments, the authors write that you should reconnect team members to the work’s meaning by showing them the impact of what they do.)
Problems are the challenges that get in the way of reaching your goals. Dalio says that you have to overcome your ego to recognize your problems: Examine yourself unflinchingly and understand your weaknesses objectively, rather than shying away from them. He emphasizes that this step is about simply identifying what’s wrong, not coming up with ways to fix it.
In addition to his advice for overcoming your ego that we explored in Part 2, he offers these tips for recognizing problems:
Dalio states that every failure is your personal failure—it means you weren’t creative or flexible or determined enough to achieve your goal. Get over your desire for comfort, and hold yourself accountable by acknowledging your weaknesses and problems that led or that could lead to failure.
Keep in mind that acknowledging your problems isn’t the same as surrendering to them—acknowledging problems means being aware of them so you can find a way to fix them and reach your goal; surrendering means giving up, which means you’ll never reach your goal.
(Shortform note: According to Extreme Ownership, leaders also have to be accountable for their team members’ failures. If a subordinate makes a mistake, reflect on whether you provided the information and resources they needed to succeed. You also have to fill in the gaps of their training to prevent them from making the same mistake again.)
There are many problems that can come up as you try to reach your goals. Dalio says that you should be very precise when describing them because the more precise you are, the better the solutions you can design.
Your time and energy are finite, so it’s important to determine which problems deserve more of your attention. Dalio advises prioritizing those that will give you the biggest returns when solved, while also devoting some time to looking at small problems that may be telling of bigger issues.
(Shortform note: If you’re feeling stuck and unable to find solutions, try to go back to your problem statement and change the way you describe the problem. Describing the problem differently can open up different avenues of thinking, trigger new associations, and lead to more creative solutions.)
To precisely describe problems in your organization, you should name specific people involved. Don’t generalize by using “we,” “they,” and “someone.”
(Shortform note: In your organization, avoid saying, “Don’t bring me problems, bring me solutions,” because this might lead to half-baked solutions from people who lack understanding of the real problem. In Originals, Adam Grant says that you should instead encourage employees to identify the issues even if they haven’t figured out the solutions yet.)
Dalio says that there’s no difference between not identifying a problem, and identifying a problem but not doing anything about it. Both of these things keep you from reaching your goals. If you avoid solving problems because they seem too difficult, your situation will only get worse.
(Shortform note: Avoiding problems can not only exacerbate them but also increase your stress and anxiety—so it’s important to get a handle on your avoidance. To stop yourself from using avoidance as a coping mechanism, focus on the next step instead of being overwhelmed by looking at a distant finish line.)
People in your organization shouldn’t be afraid of discovering and reporting problems. Dalio says that you should demonstrate that it’s OK to make mistakes, and that you shouldn’t fire people for making an honest mistake, because this incentivizes hiding errors. However, it should be unacceptable for people to hide mistakes or resist identifying and learning from them.
A Healthy Approach to Mistakes
Your team can only learn from their mistakes, problems, and failures if they’re not afraid to admit them. In Creativity, Inc., Pixar co-founder Ed Catmull offers actionable tips for taking away the negative stigma of failure and promoting conversation around it:
Determine your company’s view of failure. Think about what happens when you discover a mistake. If people tend to look for a scapegoat or do nothing, then your company likely has a negative view of failure. Change this mindset by setting an example: When you make mistakes, own up to them, explain what you learned, and move forward.
Build trust. Encourage managers to let go of micromanaging and embrace their role of creating an environment where people are free to fail and pick themselves up. You can make them feel more comfortable doing this by building trust through repeated instances of being transparent and candid.
Keep pushing forward. Instead of planning ways to avoid failure, you should make plans to move forward despite failure, even if they’re risky. Create a failure roadmap to help keep you on track.
Know when to let go of projects or people. While some failure is necessary for growth, repeated failure is a sign that people aren’t learning from their mistakes. In this case, you’ll have to put a stop to a project or replace the people involved, and analyze the failure and use what you learned to make better decisions moving forward.
Sometimes people don’t even realize that there’s a problem. Dalio warns of two situations where this can happen: First is the boiling frog syndrome, where things slowly but progressively get worse without anyone noticing until it’s too late. Second is groupthink, where someone sees something wrong but assumes that it’s not a problem because no one else has brought it up. To get over these barriers, Dalio says it’s important to speak up right away when you see anything that seems amiss and to train your team members to speak up as well.
(Shortform note: Both the boiling frog syndrome and groupthink may stem from a fear of voicing opposing concerns. Team members may be more comfortable speaking up if they don’t feel pressured to agree with their boss. Consider that you might be a problem: Try removing yourself from the decision-making process and acting as a facilitator instead.)
Often, problems can unfold as a chain reaction, and the problem you’re looking at is just a syndrome of the primary source (what Dalio calls the “root cause”). Using a medical analogy, your problems are symptoms, and the primary source is the disease. To stop your symptoms, you need to cure the disease. Likewise, to be able to truly solve your problems, you must identify the primary source.
In organizations, a common mistake is the tendency to deal with problems as one-time events, rather than diagnosing problems with the organization. If you don’t address the primary source, the problem will keep occurring again and again. Dalio reiterates that you should focus on what the problem is and what caused it, before worrying about how to solve it.
Get a Clearer Picture of the Problem
Many people rush to solve a problem because it gives them a sense of comfort and accomplishment. However, addressing the symptom of a problem rather than the source can make things worse. Keep the following guidelines in mind to uncover the fundamental cause of the issue:
Look at the facts, not just the data. Look beyond spreadsheets and instead gather facts through observation. A report can tell you how often a team member misses deadlines, but it doesn’t show that the team member is working with an archaic laptop that constantly breaks down.
Reframe your problem statements. You should clearly and precisely describe what the problem is. This leads to more detailed questions that lead to better solutions.
Work your way backward. Use a fishbone diagram: Start with the problem, then branch out into factors that can help you identify underlying issues creating the problem. For example, the problem of a missed deadline can have six factors: people, method, measurement, equipment, environment, and materials. List the possible problems under each category (such as “no communication from client” under people, or “no means to track progress” under measurement) to see all the contributing factors.
To diagnose the primary source of problems, Dalio has the following tips:
Your bad personal habits are often related to your problems. Dalio says that if you can identify and rid yourself of your top three harmful habits, you may address some primary sources of your problems and more quickly reach your goals.
(Shortform note: Author James Clear says that it can be hard to break bad habits because they give you some sort of benefit. For example, smoking can help you relax, or scrolling through social media for hours can help you feel connected. To break a bad habit, you should thus substitute it with a behavior that gives the same benefit—instead of smoking, you can go for a walk; instead of checking social media, you can chat with a friend.)
To get to the primary source of a problem, keep asking, “Why didn’t things go as they should have?” repeatedly. Dalio says this allows you to get past the first answer to a problem until you arrive at the primary source. (Shortform note: This method is known as the “five whys.” In practice, you might need to ask “why” more or less than five times, depending on how many layers of issues you find.)
To get a full view of the problem and its primary sources, ask questions about outcomes, persons in charge, responsibilities, and the design of your team, organization, or systems. Dalio warns that this type of questioning can put people on the defensive. When they’re worried about being replaced, they might put their self-interest ahead of solving the problem and refuse to be accountable.
Use the “Five Whys” Objectively in Your Organization
You can use the “five whys” to probe deeper into problems in your organization, but it can devolve into a finger-pointing session. In The Lean Startup, author Eric Ries suggests a few ways to avoid this:
Make sure everyone affected by the problem is present. This keeps those who aren’t in the room from turning into scapegoats.
Treat mistakes as opportunities for growth. Create a culture where people aren’t afraid to open up about their mistakes.
Test out the Five Whys method slowly. Ries recommends starting with smaller problems so that the tangents are fewer, the stakes are lower, and the actionables are easier to implement.
Assign someone to be in charge. A senior person should facilitate discussions, mediate disagreements, and follow up on actionables.
Remember that diagnosing a problem should lead to improvements and positive outcomes. Otherwise, it’s just a waste of time. Dalio gives the following tips for coming up with solutions once you’ve found the core of your problem:
Think about everything that happened that has led to the problem at hand. Then, figure out the changes you need to produce better outcomes in the future. Write down the specific tasks and timelines you come up with.
Visualize what must happen and when in order to overcome your problems and reach your goals. Write down the specific tasks and timelines you come up with.
(Shortform note: During the planning stage, you should also identify potential problems or flaws within your plan, assess how serious and likely they are, and come up with contingencies.)
When coming up with solutions, Dalio says to consider the second- and third-order consequences of any change. (As we’ve discussed, these are the domino effects of an action.) Also consider that the same problem may be happening in other teams or departments. He says that if it’s a problem across the board, then you may need to redesign the entire machine to address a fundamental problem.
How to Address Problematic System Structures
In Thinking in Systems, author Donella H. Meadows describes the following “system traps,” or system structures that often lead to problematic patterns of behavior in business and in the real world, and their corresponding solutions:
Policy resistance—this happens when those in a system have personal goals that differ from the system policies. This results in people within the same system moving toward different goals, like a game of tug of war. The solution is to give up the policy and to develop one that gets everyone aligned.
Drift to low performance—those in the system become complacent and don’t notice a gradual decline in performance. The solution is to set absolute standards that aren’t dependent on previous performance, or to set the bar relative to the best performance, not the worst.
Tragedy of the commons—everyone acts in their own self-interest without realizing how their behavior has an impact on others, eventually leading to self-destruction. The solution is to strengthen the feedback loop between behaviors and consequences.
Rule beating—those in the system find loopholes in rules, enabling them to be compliant while still undermining the system. The solution is to figure out the ways people can evade rules and design better rules to prevent this.
Optimizing for the wrong goal—those in the system progress toward a goal that isn’t the desired result. The solution is to accurately define a goal and proper metrics that quantify progress toward that goal.
Write down a detailed plan, including tasks and timelines, and make sure everyone sees it. Keep going back to your plan to check on your progress.
How to Effectively Communicate a New Plan
Communicating your plan doesn’t automatically mean that people will buy into it. Here’s how you can effectively communicate a new strategy and, more importantly, get your team on board:
Keep it simple, but connect it to your purpose. The plan should be easy to understand and inspiring, while reminding your employees of how it’s related to your organization’s bigger goal.
Make a communication framework based on three pillars: Inspire—your message should be memorable and exciting; educate—break out into small groups and have dialogues about people’s roles in the new strategy; and reinforce—repeat the strategy through various channels.
Assign ambassadors to deliver important messages. Employees will be more receptive to their peers than to the company CEO.
Once you have your plan, Dalio outlines three tactics to see it through:
Dalio says that successful people typically have to-do lists. They make sure to tick off each task on the list in order of priority.
(Shortform note: Other habits that successful people practice include multitasking strategically (also known as batching), setting a routine, and scheduling time for creative thinking.)
You can’t manage what you can’t measure, so Dalio encourages you to have metrics for every goal. These metrics can help you see if you’re hitting your targets, falling behind, or not moving at all. If you find that you’re falling behind or remaining stagnant, it means there’s a problem that you need to diagnose and solve.
Have team members regularly report on their planned and actual progress, and forecast the progress to come. Hold people accountable for their responsibilities.
(Shortform note: Making these check-ins a regular activity allows you to promptly see if there’s anything wrong and enables you to recalibrate right away. Additionally, these check-ins can reveal otherwise underappreciated signs of progress to employees, which studies have shown to be a greater motivation than bonuses or recognition.)
Remember the goals you want to achieve and how your plans will help you achieve those goals. If you lose sight of your goals, you will lose motivation in your plan. To stay motivated, Dalio says you should only work on goals that excite you. He also says that you should expect failures, but that you shouldn’t be frustrated by them because you can always find creative ways to overcome them.
(Shortform note: While Dalio says that excitement is an important element to staying motivated, excitement can be fleeting. Instead, focus on your purpose, and come up with a strategy to keep doing things even when you aren’t feeling excited. This might mean getting other people involved, finding ways to gain momentum, or pairing unexciting activities with those that give you pleasure.)
Dalio says you can use rewards or punishments to motivate people to reach goals, but it’s important to be consistent throughout the organization—for example, one department shouldn’t get a bigger bonus than another for reaching a collective goal. While Dalio mentions the long hours it may take to reach a goal, he also highlights the importance of resting to avoid burnout and of celebrating successes.
The Work Doesn’t Stop
Celebrating success doesn’t mean you can be complacent. In Think Like a Rocket Scientist, author Ozan Varol writes that success isn’t final—you’re only as good as your last win, so you should strive to keep growing. He writes that you can learn these lessons from success to help you avoid becoming complacent:
Reflect on “near misses.” Think about the instances when things could have gone either way. This can help you prepare for similar situations in the future.
Objectively analyze every decision. Success can make you feel invincible, but always assume that things can go wrong. With every decision, use a premortem analysis to run through possible outcomes and how you can safeguard yourself against potential issues. Then, after you’ve made the decision, use a postmortem analysis to determine which outcomes were due to skill or due to pure luck.
Try working through Dalio’s tried-and-true process to create a smoother path to achieving your goals.
What goals are you aiming for? Be ambitious and don’t worry about whether you believe you can achieve them right now.
What problems are preventing you from reaching those goals?
Why do these problems exist? What is the primary source of these problems? (To figure out the primary source, try asking yourself “Why?” repeatedly until you can’t answer any more.)
How specifically will you get around these problems? What steps and tasks will you take?
What will it take for you to do the tasks required to completion? What do you anticipate will get in the way of executing your plan?