Making money in the markets is tough. The brilliant trader and investor Bernard Baruch put it well when he said, “If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy—if you can do all that and in addition you have the cool nerves of a gambler, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.” – Ray Dalio in Principles
For the uninitiated, Ray Dalio is the founder of Bridgewater Associates, one of the world’s largest hedge funds. According to Forbes, Dalio has produced more dollar gains than any other hedge fund manager. So, of course when Dalio released his book Principles we read it.
Ray writes “Principles are ways of successfully dealing with reality to get what you want out of life.” By definition, the book is about how Dalio lives and works, and what he values. The main takeaway for me is always search for the truth, regardless of whether or not it’s comfortable.
If you can get to the truth, you can start asking yourself “how do I know I’m right?” rather than thinking you are right. It’s a subtle distinction but it’s an important one. As Dalio often says, “Pain + Reflection = Progress”. Bridgewater operates on a model Dalio calls an ‘idea meritocracy’, where the best ideas win, rather than the masses.
To do this, Bridgewater uses believability-weighted decision making. It’s easier to understand through example. Imagine you’re working on a project with an accountant and a designer. You and the accountant hate the design but the designer loves it. In a democracy, you would all vote to keep or delete the design. In this case, the designer would lose (one versus two). However, in an idea meritocracy, where the best ideas win, you look at something different.
You look at who has made better decisions in the past on this particular subject. It’s likely that the designer is more “believable” in design than you or the accountant, maybe both of you combined. So the designer’s choice would overrule you.
If we expand this analogy further, imagine you are voting on the next project to do at work with a team of 50 people. 25 of you vote against the project, 25 vote for it. In equal-weighted decision making (democracy) it would be a hung vote. However, if you were working in an idea meritocracy, the people who had more believability on the topic would have votes that were worth more. In extreme cases, you could have a 49 to one vote and the single person would win (if their believability was higher than the 49 other people).
This brings us back to radical transparency, the search for truth and why it’s important for idea meritocracies. Without being radically transparent, it’s hard to know who on your team are good and bad at certain things. For an idea meritocracy to function, you must know a person’s strengths and their weaknesses. Only then can you judge their believability.
The key to being successful is knowing what the best decisions are, which you find through believability-weighted decision making, and having the courage to make them.
According to Dalio, there are three things you need to have an idea meritocracy:
First, put your honest thoughts on the table with other people putting their honest thoughts on the table.
Second, have thoughtful disagreement. Approach that with curiosity. Maybe I’m wrong. If two people disagree, one person is probably wrong. How do you know that person isn’t you? To make sure it’s not you, have quality, thoughtful disagreement.
Third, if a disagreement remains, you have to have a way of getting past that. There’s no relationship that doesn’t sometimes have disagreement. For me there’s only two things I want from people and I want to give them: reasonableness and consideration. I don’t have to always get what I want. If I have those things, I can have a good relationship with somebody.
If you haven’t had the chance you should go watch Ray Dalio’s TED Talk below.
It’s short, digestible and it’ll change the way you think about making decisions.
Once you’ve read Principles: Life & Work, you should also check out Learn or Die: Using Science to Build a Leading-Edge Learning Organization and An Everyone Culture: Becoming a Deliberately Developmental Organization. Both will allow you to dive deeper into the idea of an idea meritocracy and hopefully, will solidify what you’ve learnt in this article and in Principles.
Dalio has also released a short, 30 minute explanation video titled How The Economic Machine Works, see below.
It’s fascinating, approachable, and easy-to-understand. But just because it’s short, don’t think it’s not worth your time. The video is simple but what Dalio explains in it is multi-layered and worth revisiting again, and again.
In a world full of the noise of Twitter, the endless scrolling of Facebook and thousands of other distractions, Principles is able to cut through it all. It teaches you the importance of always fearing being wrong, no matter how right you think you are.
That’s what radical transparency is really for. It’s about the search for truth and learning how to fail well. That’s why you should always be seeking out people who you disagree with. Another person with your viewpoint isn’t going to make you a better thinker.
At Spaceship, we strongly believe in being able to thoughtfully disagree with each other. There is always a possibility that we may be wrong and that’s makes it worth the effort to seek out other people’s opinions.
We believe one of the fundamental skills of our day and age is the ability to take in what other people are saying to you, without ignoring them. We know it isn’t easy.
The search for truth should come above anything else because, as Edward D. Hess wrote in Learn or Die, “Environments of uncertainty, ambiguity, and change require exploration, invention, experimentation, and adaptation, all of which require learning.”
As Dalio shows us in Principles, the quickest way to learn is to be open to being wrong. Instead trying to be right all the time, think about why you might not be right.
The key to succeeding today is actively questioning all of your assumptions and opinions and seeking out alternative points of view. This blog our way of throwing our thoughts out into the world. If you think we’re wrong, let us know.
Greg Jensen is the co-CEO of Bridgewater, and he says all their success “derives from the company’s approach to its principles, a source of ‘compounding understanding,’ much like compound interest, over time.”
If it works for Bridgewater, it’ll probably work for you too.
