PDF Summary:Principles: Life and Work, by Ray Dalio

Ray Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world. In Principles: Life and Work, he shares the guiding principles powering his success and Bridgewater’s.

Principles is a manual for rational thinking. The main theme is that finding truth is the best way to make decisions, and that ego, emotion, and blind spots prevent you from discovering the truth. Dalio shares his major strategies to circumvent these weaknesses, including total receptivity, extreme honesty and transparency, productive conflict, and credibility-centered decision making.

In our Principles guide, you’ll learn how to get past your ego in pursuit of your goals, why you need other people to improve your probability of being right, and the five-step process for getting what you want out of life.

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Organizational

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.)

Principle #6: People Management

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:

Hiring

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.)

Training and Evaluating

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.)

Principle #7: Building Strong, Efficient Teams

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.)

Principle #8: Effective Decision-Making

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:

1) Learn Well

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.)

2) Decide Well

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.)

Dalio’s Process for Achieving Success

Many of the ideas that Dalio discusses form the foundation for his process for achieving success in any context. This involves five steps:

1) Clarify Your Goals

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.)

2) Recognize Problems and Don’t Condone Them

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.)

3) Find the Primary Source of a Problem

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.)

4) Come Up With Solutions

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.

5) Do the Tasks Required to Completion

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.