How to Make Decisions like

Ray Dalio
What is most interesting to me about Ray Dalio is his decision-making process.
This blog post is limited to a discussion of that process and not Bridgewaters
philosophy generally. If you are interested in understanding Bridgewater and
Dalio more broadly, Dalio has a book coming out this fall which expands on his
widely circulated Principles document. I have written a more general blog post
about Dalio on this blog, which you can find a link to in the Notes to this post.

Anyone who has read and understood the books and essays of Michael
Mauboussin knows that people who have a sound decision-making process have
better outcomes in life (not just in investing). Dalios view tracks Mauboussins
view: I think that every single day there are many decisions that people make
and they all have consequences. And your life essentially depends on the
cumulative quality of the decisions you make. Having said that about the
importance of making wise decisions in all aspects of life, thinking about how
Dalio makes investment decisions is a particularly effective way of understanding
his process. These quotations from Dalio set the table for a discussion of his
decision-making process:
You have to be an independent thinker in markets to be successful because the
consensus is built into the price. You have to have a view thats different from
the consensus.
To win at stocks or entrepreneurship, you must bet against the consensus and
be right.
Andy Rachleff makes the same point as Dalio is saying in this way: Investment
can be explained with a 22 matrix. On one axis you can be right or wrong. And
on the other axis you can be consensus or non-consensus. Now obviously if youre
wrong you dont make money. The only way as an investor and as an
entrepreneur to make outsized returns is by being right and non-consensus.
Another adherent to this idea is Howard Marks who has said: To achieve
superior investment results, your insight into value has to be superior. Thus you
must learn things others dont, see things differently or do a better job of
analyzing them ideally all three. Being genuinely contrarian means the investor
is going to be uncomfortable sometimes. Some people are good at being
uncomfortable, and some are not.

Dalio believes:
Most other professions you can build on existing knowledge. You dont have to
have a point of view. If youre a doctor and somebody breaks a leg or whatever,
you can repair that leg. Its not zero-sum, in the sense that you have to be
smarter than the next person or different from the consensus. Now in order to
be different from the consensus, theres a high risk youre going to be wrong.
Find people of alternative points of view and have quality conversations back
and forth. Not to let them think for me, not for me to follow their point of view,
but for me to understand the different perspectives. Because it increases my
probability of being right, and it reduces my probability of being wrong.
When you have a view thats different from the consensus, youre gonna be
wrong a certain number of times. It teaches you humility. The most important
thing is to have humility and to think about how do I get the best decision? It
doesnt have to come from me, I just want to be right.
Decision-making should be two steps. The first step is taking in information,
particularly if there is disagreement, to understand that disagreement and then
to make a decision. You have your right to make a decision. But it is so stupid
not to take the time to take in and explore disagreement that might help
prevent yourself from being wrong.
The desire to explore disagreement is the foundation of Dalios drive to create
radical transparency? Dalio describes this concept as follows:

I want an idea meritocracy. I want independent thinkers who are going to

disagree. The most important thing I want is meaningful work and meaningful
relationships and the way to get that is through radical transparency.
Meaningful work is being on a mission that youre excited about and that you
can get your head into. And in meaningful relationships you can be totally
transparent with each other, letting each other know what your weaknesses
are.
As context, what Dalio is setting out to do as an investor is extraordinarily hard.
To say that a tiny number of people outperform the markets by making macro
bets is a radical understatement. A handful of people have been able to do this
successfully over many years at scale. Dalio has discovered a source of alpha
(outperforming a benchmark) through a process that results in better decisions.

Here is my short boil the ocean description of his decision making process: Dalio
starts with a rational analysis of the information he has and from that he forms a
hypothesis. He then exposes that hypothesis to thoughtful people with
alternative points of view and methods of analysis who may disagree with him
and then he wants a radically transparent back and forth discussion. As part of
that process he wants to deeply understand the reasoning of any thoughtful
opposing views. Only after he has understood these alternative points of view
does Dalio believe he is in a position to reject or accept the alternative ideas and
make a decision. Dalios approach is quite similar to Charlie Mungers approach: I
never allow myself to have an opinion on anything that I dont know the other
sides argument better than they do. Rapid destruction of your ideas when the
time is right is one of the most valuable qualities you can acquire. You must force
yourself to consider arguments on the other side.

Why would Dalio join Twitter this week? Well, if you do use Twittter properly you
can get exposed to real time views of smart people who think differently and who
may have opposing views. He seems to understand a key point about Twitters
value when he tweeted this past week: Look forward to learning from my
mistakes in a whole new way. Bob Lefsetz explains why Twitter is so unique:
Many people treat Twitter as a broadcast medium which is a shame since the
value of interactive discussion is so much higher. Many people also turn their
Twitter feed into a echo chamber, which is a lost opportunity. Jason Zweig has a
great column this week where is describes why Investors have a hard time
looking the truth square in the face and the creation of echo chambers of all
kinds makes the problem worse.
Dalio and Munger share other approaches to decision-making. For example,
Munger, who describes his process as follows: I use a kind of two-track analysis.
First, what are the factors that really govern the interests involved, rationally
considered? The first track is rationality-the way youd work out a bridge
problem: by evaluating the real interests, the real probabilities and so forth.
Second, [I work to eliminate] influences where the brain at a subconscious level is
automatically doing these things-which by and large are useful, but which often
malfunctions. Munger and Buffett also have a third step in their decision-making
process that is similar to Dalio: expose their ideas to the best minds they can find.
In Buffetts case that mind is almost always Charlie Munger. Buffett calls Munger
the Abominable No Man. Buffett exposing an investing hypothesis to Munger is
like tempering steel if an investing hypothesis doesnt break after being exposed
to Munger it is more likelky to be sound.

Having a diverse posse of experienced people that you trust look at a potential
investment is wise if you want to avoid making too many mistakes. Philip Fisher,
an investor who Munger and many other investors learned a lot from, maintained
a scuttlebutt network of people who he would call for advice or expertise,
Munger has said: Even Einstein didnt work in isolation. But he never went to
large conferences. Any human being needs conversational colleagues. Buffett
once gave a huge compliment to Mungers value as a person who can stress test
his ideas when he said: I try to look out 10 or 20 years when making an
acquisition, but sometimes my eyesight has been poor. Charlies has been better;
he voted no more than present on several of my errant purchases.

To review what I have said in this post so far, the decision making process that
Dalio, Buffett and Munger use is:

(1) make the most rational decisions you can;

(2) look for psychological bias that may have interfered with making a rational
decision; and

(3) expose your hypothesis to very smart people who have a thoughtful contrary
view and deeply understand their position.
On this last point Daniel Kahneman believes: To better avoid errors, you should
talk to people who disagree with you and you should talk to people who are not
in the same emotional situation you are.

Dalio believes that the more a person repeats this process over the years, the
more they learn. What does this sound like to you? It is essentially what Munger
calls Worldly Wisdom. Dalio sounds very much like Munger here:

What Ive discovered in that process is that I was learning so much. So just
imagine what a fantastic path to think. Let me go after the person who has
got the opposite point of view, who is really smart, and let me have quality
conversations, quality disagreement. I get clear feedback. The goal is: dont be
too wrong. Be more right than wrong. So in that process I can take personal
accountability. If I dont learn personal accountability, if I dont learn, then Im
going to pay a terrible price. So that process itself lent itself to this kind of very
open-minded decision. Also the making mistakes, and the loving the mistakes.
Theres an art to this process of seeking out thoughtful disagreement. People
who are successful at it realize that there is always some probability they might
be wrong and that its worth the effort to consider what others are saying not
simply the others conclusions, but the reasoning behind them to be assured
that they arent making a mistake themselves. They approach disagreement
with curiosity, not antagonism, and are what I call open-minded and assertive
at the same time. This means that they possess the ability to calmly take in
what other people are thinking rather than block it out, and to clearly lay out
the reasons why they havent reached the same conclusion. They are able to
listen carefully and objectively to the reasoning behind differing opinions. When
most people hear me describe this approach, they typically say, No problem,
Im open-minded! But what they really mean is that theyre open to being
wrong. True open-mindedness is an entirely different mind-set. It is a process of
being intensely worried about being wrong and asking questions instead of
defending a position. It demands that you get over your ego-driven desire to
have whatever answer you happen to have in your head be right. Instead, you
need to actively question all of your opinions and seek out the reasoning behind
alternative points of view.
Dalios famous principles document provide a guide to decision making at
Bridgewater. Many of these principles you have seen other investors say on this
blog. For example:
190) Recognize the Power of Knowing How to Deal with Not Knowing
191) Recognize that your goal is to come up with the best answer, that the
probability of your having it is small, and that even if you have it, you cant be
confident that you do have it unless you have other believable people test you.
192) Understand that the ability to deal with not knowing is far more powerful
than knowing a) Embrace the power of asking: What dont I know, and what
should I do about it? b) Finding the path to success is at least as dependent on
coming up with the right questions as coming up with answers.
193) Remember that your goal is to find the best answer, not to give the best
one you have.
194) While everyone has the right to have questions and theories, only
believable people have the right to have opinions
195) Constantly worry about what you are missing. a) Successful people ask for
the criticism of others and consider its merit. b) Triangulate your view.
196) Make All Decisions Logically, as Expected Value Calculations
197) Considering both the probabilities and the payoffs of the consequences,
make sure that the probability of the unacceptable (i.e., the risk of ruin) is
nil. (a) The cost of a bad decision is equal to or greater than the reward of a
good decision, so knowing what you dont know is at least as valuable as
knowing. (b) Recognize opportunities where there isnt much to lose and a lot to
gain, even if the probability of the gain happening is low. (c) Understand how
valuable it is to raise the probability that your decision will be right by
accurately assessing the probability of your being right. (d) Dont bet too much
on anything. Make 15 or more good, uncorrelated bets.
What typically gets in the way of the process like Dalio wants to create? Ego and
organizational politics.

A. The ego of the decision maker is so often the source of a problem or mistake.
Dalio says that it is emotionally hard to be radically transparent. Warren Buffett
writes: Its ego. Its greed. Its envy. Its fear. Its mindless imitation of other
people. I mean, there are a variety of factors that cause that horsepower of the
mind to get diminished dramatically before the output turns out. And I would say
if Charlie and I have any advantage its not because were so smart, it is because
were rational and we very seldom let extraneous factors interfere with our
thoughts. We dont let other peoples opinion interfere with it we try to get
fearful when others are greedy. We try to get greedy when others are fearful. We
try to avoid any kind of imitation of other peoples behavior. And those are the
factors that cause smart people to get bad results. What Buffett describes is an
example of what Charlie Munger calls inversion. Instead of just trying to be smart,
it is wise to focus on not being stupid. Dalio believes:

People are so attached to being right, and yet the tragedy is it could be so easy
to find out how youre wrong. If you just said to yourself, Im not sure that Im
right, and let me go find people who have alternative point of views and let me
have quality conversations. Not to pay attention to their conclusions, but to
the thought process. So thoughtful discussion, worrying about being wrong but
not to the sense of being paralyzed. Or moving forward, but in the sense of
trying to create discovery, to have an exchange. To go after the person who has
the most different point of view, who is the most thoughtful, and then have a
conversation to see their point of view. Whether a person could be both open-
minded and assertive at the same time, that creates a discovery process. It
creates a fabulous learning. That process itself reduces the probability of being
wrong and produces a great deal of learning. People are so hung up on being
right. Starting their discussion and deriving some sort of satisfaction if, at the
end of the discussion, they were where they began the discussion. That doesnt
make any sense, because theres not going to be any learning. So ego plays an
important role in that. The people that feel like, Im good. Ive got it, wont
learn. If youve got it, you wont learn. So you have to get rid of this ego barrier,
Ive got it thing.
You start to learn how people see things differently. And rather than just
seeing how you see it, you go above that. Youre seeing that everybody is seeing
things differently. It changes how you see things because it starts to make you
think, how do I know Im not the wrong one? You start to think, how do I
collectively see? And its like being in a different color range. All of the sudden
you see the full spectrum. When you start to realize that people are actually
seeing in those [different] ways that its a valid way of seeing, and that I need
you and you need me it gives you the evidence base that its okay to be
different. The most important thing is to have humility, and to think about, how
do I get the best decision? It doesnt have to come from me. I just want it to be
right, right? If comes from other people, thats good. The greatest tragedy of
mankind is people holding on to wrong opinions that could so easily be rectified
and that are doing them harm because theyre making wrong decisions.
B. Organizational politics. One advantage that Buffett and Munger have is that in
many cases the radically transparent discussion is just between the two of
them. Both Buffett and Munger have said that they sometimes disagree but have
never had an argument that was hostile. They have also decided to focus on
investing decisions that involve forecasts about microeconomics. In contrast,
Dalio is engaged in macro investing and his supporting organization is far larger.
Reuters describes what must be managed at Bridgewater as follows:

Bridgewater manages about $160 billion, according to its website, and is known
for a unique culture of radical truth and radical transparency whereby
intellectual conflict is encouraged to promote a meritocracy of ideas, avoiding
traditional office politics. The culture is not for everyone. The firm is known for
relatively high turnover among its roughly 1,700-person staff. An estimated 25
percent depart during the first 18 months of employment.

The challenges associated with maintaining a culture like Bridgewater which is

willing to incur the overhead of continuously providing feedback and utilizing it in
decision-making in an idea meritocracy are significant. The number of
connections between employees increases with the square of the number of
involved employees, which has caused Dalio to come up with some unusual
approaches to maintaining radical transparency like videotaping and making
available to anyone almost all meetings and the use of Bridgewater designed
baseball cards. It is precisely because what Dalio is doing at Bridgewater is so hard
that Bridgewaters alpha has been persistent. If doing what Bridgewater does was
easy, the alpha would disappear. Being different is a source of competitive
advantage. If you want different results you must act in a different way.

To see how Dalio tries to combat dysfunctional corporate politics at Bridgewater

it is useful to examine how he describes his principles:
Never say anything about a person you wouldnt say to him directly. If you do,
youre a slimy weasel. Badmouthing people behind their backs shows a serious
lack of integrity. It doesnt yield any beneficial change and it subverts both the
people you are bad mouthing and the environment as a whole. Next to being
dishonest, it is the worst thing you can do at Bridgewater. Criticism is both
welcomed and encouraged at Bridgewater, so there is no good reason to talk
behind peoples backs. You need to follow this policy to an extreme degree to
be in harmony with our culture. For example, managers should not talk about
people who work for them without those people in the room. So every
meeting is taped and made available for everybody in the company to look at.
And all we have are conversations of, What makes sense? Everybody has the
right to make sense of things. Now in that environment I get to see how
differently people think. I realize how radically different people think. This
approach comes to life at Bridgewater in our weekly research meetings, in
which our experts on various areas openly disagree with one another and
explore the pros and cons of alternative views. This is the fastest way to get a
good education and enhance decision-making. When everyone agrees and their
reasoning makes sense to me, Im usually in good shape to make a decision.
When people continue to disagree and I cant make sense of their reasoning, I
know I need to ask more probing questions or get more triangulation from
other experts before deciding. I want to emphasize that following this process
doesnt mean blindly accepting the conclusions of others or adopting rule by
referendum. Our CIOs are ultimately responsible for our investment decision-
making. But we all make better decisions by maintaining an independent view
and the conflicting possibilities in our minds simultaneously, and then trying to
resolve the differences. Were always in the place of holding an opinion and
simultaneously stress-testing the hell out of it. Operating this way just seems
like common sense to me. After all, when two people disagree, logic demands
that one of them must be wrong. Why wouldnt you want to make sure that
that person isnt you?
This sort of total honesty and transparency is not a comfortable environment for
many people, but it is for enough talented people that Bridgewater has been able
to assemble its team and compile its remarkable investing record. If you want to
dig into radical transparency and issues like how ego and emotions can get in the
way of Dalios approach to making decisions, I suggest you watch The Culture
Principle video linked second in the Notes below.