Principles: Life and Work - by Ray Dalio

Principles are concepts that can be applied over and over again in similar circumstances as distinct from narrow answers to specific questions. When digesting each principle, please... ask yourself: “Is it true?”

PART 1: THE IMPORTANCE OF PRINCIPLES

  1. WHAT ARE PRINCIPLES? Your values are what you consider important, literally what you “value.” Principles are what allow you to live a life consistent with those values. Principles connect your values to your actions; they are beacons that guide your actions, and help you successfully deal with the laws of reality. It is to your principles that you turn when you face hard choices.

  2. WHY ARE PRINCIPLES IMPORTANT? Without principles, you would be forced to react to circumstances that come at you without considering what you value most and how to make choices to get what you want. This would prevent you from making the most of your life.

  3. WHERE DO PRINCIPLES COME FROM? Sometimes we forge our own principles and sometimes we accept others’ principles, or holistic packages of principles, such as religion and legal systems. While it isn’t necessarily a bad thing to use others’ principles—it’s difficult to come up with your own, and often much wisdom has gone into those already created—adopting pre-packaged principles without much thought exposes you to the risk of inconsistency with your true values.

  4. DO YOU HAVE PRINCIPLES THAT YOU LIVE YOUR LIFE BY? WHAT ARE THEY? Your principles will determine your standards of behavior. When you enter into relationships with other people, your and their principles will determine how you interact. People who have shared values and principles get along. People who don’t will suffer through constant misunderstandings and conflict with one another.

  5. HOW WELL DO YOU THINK THEY WILL WORK, AND WHY?

PART 2: MY MOST FUNDAMENTAL LIFE PRINCIPLES

I want you to work for yourself, to come up with independent opinions, to stress-test them, to be wary about being overconfident, and to reflect on the consequences of your decisions and constantly improve.

Through this time and till now I followed the same basic approach I used as a 12-year-old caddie trying to beat the market, i.e., by 1) working for what I wanted, not for what others wanted me to do; 2) coming up with the best independent opinions I could muster to move toward my goals; 3) stress-testing my opinions by having the smartest people I could find challenge them so I could find out where I was wrong; 4) being wary about overconfidence, and good at not knowing; and 5) wrestling with reality, experiencing the results of my decisions, and reflecting on what I did to produce them so that I could improve.

I learned that failure is by and large due to not accepting and successfully dealing with the realities of life, and that achieving success is simply a matter of accepting and successfully dealing with all my realities.

I learned that finding out what is true, regardless of what that is, including all the stuff most people think is bad—like mistakes and personal weaknesses—is good because I can then deal with these things so that they don’t stand in my way.

I learned that there is nothing to fear from truth. While some truths can be scary—for example, finding out that you have a deadly disease—knowing them allows us to deal with them better. Being truthful, and letting others be completely truthful, allows me and others to fully explore our thoughts and exposes us to the feedback that is essential for our learning.

I learned that being truthful was an extension of my freedom to be me. I believe that people who are one way on the inside and believe that they need to be another way outside to please others become conflicted and often lose touch with what they really think and feel. It’s difficult for them to be happy and almost impossible for them to be at their best. I know that’s true for me.

I learned that I want the people I deal with to say what they really believe and to listen to what others say in reply, in order to find out what is true. I learned that one of the greatest sources of problems in our society arises from people having loads of wrong theories in their heads—often theories that are critical of others—that they won’t test by speaking to the relevant people about them. Instead, they talk behind people’s backs, which leads to pervasive misinformation. I learned to hate this because I could see that making judgments about people so that they are tried and sentenced in your head, without asking them for their perspective, is both unethical and unproductive.[9] So I learned to love real integrity (saying the same things as one believes)[10] and to despise the lack of it.

While most others seem to believe that learning what we are taught is the path to success, I believe that figuring out for yourself what you want and how to get it is a better path.

While most others seem to believe that having answers is better than having questions, I believe that having questions is better than having answers because it leads to more learning.

While most others seem to believe that mistakes are bad things, I believe mistakes are good things because I believe that most learning comes via making mistakes and reflecting on them.

While most others seem to believe that finding out about one’s weaknesses is a bad thing, I believe that it is a good thing because it is the first step toward finding out what to do about them and not letting them stand in your way.

While most others seem to believe that pain is bad, I believe that pain is required to become stronger.

MY MOST FUNDAMENTAL PRINCIPLES

Truth — more precisely, an accurate understanding of reality — is the essential foundation for producing good outcomes. This perspective gives me a non-traditional sense of good and bad: “good,” to me, means operating consistently with the natural laws, while “bad” means operating inconsistently with these laws. In other words, for something to be “good” it must be grounded in reality. And if something is in conflict with reality—for example, if morality is in conflict with reality—it is “bad,” i.e., it will not produce good outcomes. In other words, I believe that understanding what is good is obtained by looking at the way the world works and figuring out how to operate in harmony with it to help it (and yourself) evolve. But it is not obvious, and it is sometimes difficult to accept.

I believe that evolution, which is the natural movement toward better adaptation, is the greatest single force in the universe, and that it is good.

I believe that the desire to evolve, i.e., to get better, is probably humanity’s most pervasive driving force.

I believe that pursuing self-interest in harmony with the laws of the universe and contributing to evolution is universally rewarded, and what I call “good.”

It is extremely important to one’s happiness and success to know oneself—most importantly to understand one’s own values and abilities—and then to find the right fits. We all have things that we value that we want and we all have strengths and weaknesses that affect our paths for getting them. The most important quality that differentiates successful people from unsuccessful people is our capacity to learn and adapt to these things.

THE PERSONAL EVOLUTIONARY PROCESS

The quality of our lives depends on the quality of the decisions we make.

Reality + Dreams + Determination = A Successful Life

For most people happiness is much more determined by how things turn out relative to their expectations rather than the absolute level of their conditions. This basic principle suggests that you can follow one of two paths to happiness: 1) have high expectations and strive to exceed them, or 2) lower your expectations so that they are at or below your conditions.

YOUR MOST IMPORTANT CHOICES

I believe that there are five big types of choices that we continually must make that radically affect the quality of our lives and the rates at which we move toward what we want.

  1. FIRST: It is a fundamental law of nature that to evolve one has to push one’s limits, which is painful, in order to gain strength—whether it’s in the form of lifting weights, facing problems head-on, or in any other way. Pain + Reflection = Progress How big of an impediment is psychological pain to your progress?

  2. SECOND: People who know that understanding what is real is the first step toward optimally dealing with it make better decisions. So, remember... Ask yourself, “Is it true?” ...because knowing what is true is good. How much do you let what you wish to be true stand in the way of seeing what is really true?

  3. THIRD: People who worry about looking good typically hide what they don’t know and hide their weaknesses, so they never learn how to properly deal with them and these weaknesses remain impediments in the future. So, what are your biggest weaknesses? Think honestly about them because if you can identify them, you are on the first step toward accelerating your movement forward. So think about them, write them down, and look at them frequently. How much do you worry about looking good relative to actually being good?

  4. FOURTH: People who overweigh the first-order consequences of their decisions and ignore the effects that the second- and subsequent-order consequences will have on their goals rarely reach their goals.

  5. FIFTH: Successful people understand that bad things come at everyone and that it is their responsibility to make their lives what they want them to be by successfully dealing with whatever challenges they face. Successful people know that nature is testing them, and that it is not sympathetic.

YOUR TWO YOUS AND YOUR MACHINE

Think of it as though there are two yous—you as the designer and overseer of the plan to achieve your goals (let’s call that one you(1)) and you as one of the participants in pursuing that mission (which we will call you(2)). You(2) are a resource that you(1) have to get what you(1) want, but by no means your only resource. To be successful you(1) have to be objective about you(2).

If you(1) see that you(2) are not capable of doing something, it is only sensible for you(1) to have someone else do it. In other words, you(1) should look down on you(2) and all the other resources at your(1) disposal and create a “machine” to achieve your(1) goals, remembering that you(1) don’t necessarily need to do anything other than to design and manage the machine to get what you(1) want. If you(1) find that you(2) can’t do something well fire yourself(2) and get a good replacement! You shouldn’t be upset that you found out that you(2) are bad at that—you(1) should be happy because you(1) have improved your(1) chances of getting what you(1) want. If you(1) are disappointed because you(2) can’t be the best person to do everything, you(1) are terribly naïve because nobody can do everything well.

The biggest mistake most people make is to not see themselves and others objectively. If they could just get around this, they could live up to their potentials.

MY 5-STEP PROCESS TO GETTING WHAT YOU WANT OUT OF LIFE

Have clear goals. Identify and don’t tolerate the problems that stand in the way of achieving your goals. Accurately diagnose these problems. Design plans that explicitly lay out tasks that will get you around your problems and on to your goals. Implement these plans—i.e., do these tasks.

  1. You must approach these as distinct steps rather than blur them together. For example, when setting goals, just set goals (don’t think how you will achieve them or the other steps); when diagnosing problems, just diagnose problems (don’t think about how you will solve them or the other steps).

  2. Each of these five steps requires different talents and disciplines. Most probably, you have lots of some of these and inadequate amounts of others. If you are missing any of the required talents and disciplines, that is not an insurmountable problem because you can acquire them, supplement them, or compensate for not having them, if you recognize your weaknesses and design around them. So you must be honestly self-reflective.

  3. It is essential to approach this process in a very clear-headed, rational way rather than emotionally.

To help you do these things well—and stay centered and effective rather than stressed and thrown off by your emotions—try this technique for reducing the pressure: treat your life like a game or a martial art. Your mission is to figure out how to get around your challenges to get to your goals.

THE 5 STEPS CLOSE-UP

  1. SETTING GOALS

You can have virtually anything you want, but you can’t have everything you want.

Avoid setting goals based on what you think you can achieve. As I said before, do each step separately and distinctly without regard to the others. In this case, that means don’t rule out a goal due to a superficial assessment of its attainability. This requires some faith that you really can achieve virtually anything, even if you don’t know how you will do it at that moment.

Achieving your goals isn’t just about moving forward. Inevitably, you must deal with setbacks. So goals aren’t just those things that you want and don’t have. They might also be keeping what you do have, minimizing your rate of loss, or dealing with irrevocable loss.

  1. IDENTIFYING AND NOT TOLERATING PROBLEMS

Most problems are potential improvements screaming at you. The more painful the problem, the louder it is screaming. In order to be successful, you have to 1) perceive problems and 2) not tolerate them.

It is essential to bring problems to the surface. Most people don’t like to do this. But most successful people know that they have to do this. So push through the pain of facing your problems, knowing you will end up in a much better place. When identifying problems, it is important to remain centered and logical. Try to look at your problems as a detached observer would. Remember that identifying problems is like finding gems embedded in puzzles; if you solve the puzzles you will get the gems that will make your life much better. Doing this continuously will lead to your rapid evolution. So, if you’re logical, you really should get excited about finding problems because identifying them will bring you closer to your goals.

Be very precise in specifying your problems.

Don’t confuse problems with causes. “I can’t get enough sleep” is not a problem; it is a cause of some problem. What exactly is that problem? To avoid confusing the problem with its causes, try to identify the suboptimal outcome, e.g., “I am performing badly in my job because I am tired.”

Once you identify your problems, you must not tolerate them.

Can you comfortably identify your problems without thinking about how to solve them? It is a good exercise to just make a list of them, without possible solutions. Only after you have created a clear picture of your problems should you go to the next step.

  1. DIAGNOSING THE PROBLEMS

You will be much more effective if you focus on diagnosis and design rather than jumping to solutions. You must be calm and logical.

It is important to distinguish root causes from proximate causes. Proximate causes typically are the actions or lack of actions that lead to problems—e.g., “I missed the train because I didn’t check the train schedule.” So proximate causes are typically described via verbs. Root causes are the deeper reasons behind the proximate cause: “I didn’t check the schedule because I am forgetful”—a root cause. Root causes are typically described with adjectives, usually characteristics about what the person is like that lead them to an action or an inaction.

Recognizing and learning from one’s mistakes and the mistakes of others who affect outcomes is critical to eliminating problems.

More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.

Remember that: Pain + Reflection = Progress

  1. DESIGNING THE PLAN (DETERMINING THE SOLUTIONS)

When designing solutions, the objective is to change how you do things so that problems don’t recur—or recur so often. Think about each problem individually, and as the product of root causes—like the outcomes produced by a machine. Then think about how the machine should be changed to produce good outcomes rather than bad ones.

Most people make the very big mistake of spending virtually no time on this step because they are too preoccupied with execution.

Remember: Designing precedes doing! The design will give you your to-do list (i.e., the tasks).

  1. DOING THE TASKS

It is critical to know each day what you need to do and have the discipline to do it.

THE RELATIONSHIPS BETWEEN THESE STEPS

Designs and tasks have no purpose other than to achieve your goals. Frequently I see people feel great about doing their tasks while forgetting the goals they were designed to achieve, resulting in the failure to achieve their goals. To remember the connections between the tasks and the goals that they are meant to achieve, you just have to ask, “Why?”

PART 3: MY MANAGEMENT PRINCIPLES

I want Bridgewater to be a company in which people collectively...

  1. work for what they want and not for what others want of them.
  2. come up with the best independent opinions they can muster to move toward their goals
  3. stress-test their opinions by having the smartest people they can find to challenge them so they can find out where they are wrong
  4. are wary about overconfidence, and good at not knowing
  5. wrestle with reality, experiencing the results of their decisions, and reflecting on what they did to produce them so that they can improve.

TO GET THE CULTURE RIGHT...

  1. Trust in Truth
  2. Be extremely open.
  3. Have integrity and demand it from others.
  4. Don’t tolerate dishonesty.
  5. Create a culture in which it is OK to make mistakes but unacceptable not to identify, analyze, and learn from them
  6. Constantly get in synch about what is true and what to do about it.
  7. Recognize that conflicts are essential for great relationships because they are the means by which people determine whether their principles are aligned and resolve their differences.
  8. Don’t treat all opinions as equally valuable.
  9. Consider your own and others’ “believabilities.” a) Ask yourself whether you have earned the right to have an opinion. b) People who have repeatedly and successfully accomplished the thing in question and have great explanations when probed are most believable. c) If someone asks you a question, think first whether you’re the responsible party/right person to be answering the question.

TO GET THE PEOPLE RIGHT...

  1. Recognize the most important decisions you make are who you choose to be your responsible party
  2. Remember that almost everything good comes from having great people operating in a great culture.
  3. Choose those who understand the difference between goals and tasks to run things.
  4. Recognize that people are built very differently
  5. Hire right, because the penalties of hiring wrong are huge
  6. Look for people who have lots of great questions.
  7. Manage as someone who is designing and operating a machine to achieve the goal. Managing the people who report to you should feel like “skiing together.”
  8. Hold people accountable and appreciate them holding you accountable. Distinguish between failures where someone broke their “contract” from ones where there was no contract to begin with.
  9. Think like an owner, and expect the people you work with to do the same.
  10. Force yourself and the people who work for you to do difficult things.
  11. Don’t worry if your people like you; worry about whether you are helping your people and Bridgewater to be great.
  12. Avoid staying too distant. Tool: Use daily updates as a tool for staying on top of what your people are doing and thinking.
  13. Probe deep and hard to learn what to expect from your “machine”
  14. Remember that few people see themselves objectively, so it’s important to welcome probing and to probe others.
  15. Probe so that you have a good enough understanding of whether problems are likely to occur before they actually do.
  16. Evaluate people accurately, not “kindly”
  17. Recognize that while most people prefer compliments over criticisms, there is nothing more valuable than accurate criticisms.
  18. Provide constant, clear, and honest feedback, and encourage discussion of this feedback.
  19. Train and test people through experiences
  20. Know that experience creates internalization
  21. Teach your people to fish rather than give them fish.

TO PERCEIVE, DIAGNOSE, AND SOLVE PROBLEMS...

  1. Know how to perceive problems effectively. Keep in mind the 5-Step process explained in Part 2.
  2. Understand that problems are the fuel for improvement.
  3. Don’t tolerate badness.
  4. The people closest to certain jobs probably know them best, or at least have perspectives you need to understand, so those people are essential for creating improvement.
  5. Diagnose to understand what the problems are symptomatic of
  6. Design your machine to achieve your goals
  7. Don’t act before thinking. Take the time to come up with a game plan
  8. Most importantly, build the organization around goals rather than tasks.
  9. Constantly think about how to produce leverage. You should be able to delegate the details away.
  10. Tool: Maintain a procedures manual.
  11. Tool: Use checklists. a) Don’t confuse checklists with personal responsibility. b) Remember that “systematic” doesn’t necessarily mean computerized. c) Use “double-do” rather than “double-check” to make sure mission-critical tasks are done correctly.

TO MAKE DECISIONS EFFECTIVELY...

  1. Recognize the power of knowing how to deal with not knowing
  2. Make all decisions logically, as expected value calculations a) Recognize opportunities where there isn’t much to lose and a lot to gain, even if the probability of the gain happening is low. b) Don’t bet too much on anything. Make 15 or more good, uncorrelated bets.
  3. Remember the 80/20 Rule, and know what the key 20% is
  4. Remember that the best choices are the ones with more pros than cons, not those that don’t have any cons. Watch out for people who tend to argue against something because they can find something wrong with it without properly weighing all the pros against the cons.
  5. Understand the concept and use the phrase “by and large.” When you ask someone whether something is true and they tell you that “It’s not totally true,” it’s probably true enough.

TO GET THE CULTURE RIGHT...

  1. Realize that you have nothing to fear from truth.
  2. Create an environment in which everyone has the right to understand what makes sense and no one has the right to hold a critical opinion without speaking up about it.
  3. Be extremely open. Openness leads to truth and trust. Being open about what you dislike is especially important, because things you don’t like need to be changed or resolved.
  4. Have integrity and demand it from others. People who are one way on the inside and another way outside lack integrity; they have duality.
  5. Never say anything about a person you wouldn’t say to them directly, and don’t try people without accusing them to their face.
  6. Don’t let “loyalty” stand in the way of truth and openness.
  7. Be radically transparent.
  8. Don’t tolerate dishonesty. Don’t believe it when someone caught being dishonest says they have seen the light and will never do that sort of thing again.

CREATE A CULTURE IN WHICH IT IS OK TO MAKE MISTAKES BUT UNACCEPTABLE NOT TO IDENTIFY, ANALYZE, AND LEARN FROM THEM

  1. Recognize that effective, innovative thinkers are going to make mistakes and learn from them because it is a natural part of the innovation process.
  2. Do not feel bad about your mistakes or those of others. Love them!
  3. Observe the patterns of mistakes to see if they are a product of weaknesses.
  4. Don’t worry about looking good - worry about achieving your goals.
  5. Get over “blame” and “credit” and get on with “accurate” and “inaccurate.”
  6. Don’t depersonalize mistakes.
  7. Write down your weaknesses and the weaknesses of others to help remember and acknowledge them.
  8. When you experience pain, remember to reflect. You can convert the “pain” of seeing your mistakes and weaknesses into pleasure. If there is only one piece of advice I can get you to remember it is this one.
  9. Teach and reinforce the merits of mistake-based learning.

CONSTANTLY GET IN SYNCH

  1. Constantly get in synch about what is true and what to do about it.
  2. Talk about “Is it true?” and “Does it make sense?”
  3. Fight for right.
  4. Be assertive and open-minded at the same time.
  5. Ask yourself whether you have earned the right to have an opinion.
  6. Recognize that you always have the right to have and ask questions.
  7. Distinguish open-minded people from closed-minded people.
  8. Don’t have anything to do with closed-minded, inexperienced people. Being open-minded is far more important than being bright or smart.
  9. Be wary of the arrogant intellectual who comments from the stands without having played on the field.
  10. Watch out for people who think it’s embarrassing not to know.
  11. Recognize that conflicts are essential for great relationships because they are the means by which people determine whether their principles are aligned and resolve their differences.
  12. There is giant untapped potential in disagreement, especially if the disagreement is between two or more thoughtful people - yet most people either avoid it or they make it an unproductive fight. That’s tragic.
  13. Recognize that “there are many good ways to skin a cat.”
  14. Distinguish between 1) idle complaints and 2) complaints that are meant to lead to improvement.
  15. Evaluate whether an issue calls for debate, discussion, or teaching. Debate is generally among approximate equals; discussion is open-minded exploration among people of various levels of understanding; and teaching is between people of different levels of understanding.
  16. To avoid confusion, make clear which kind of conversation (debate, discussion, or teaching) you are having and recognize that the purpose is ultimately to get at truth, not to prove that someone is right or wrong.
  17. Communication aimed at getting the best answer should involve the most relevant people.
  18. Consider your own and others’ “believabilities.”
  19. People who have repeatedly and successfully accomplished the thing in question and have great explanations when probed are most believable.
  20. Spend lavishly on the time and energy you devote to “getting in synch” because it’s the best investment you can make.
  21. If it is your meeting to run, manage the conversation.
  22. Achieve completion in conversations.
  23. Have someone assigned to maintain notes in meetings and make sure follow-through happens.

TO GET THE PEOPLE RIGHT...

  1. Most importantly, find people who share your values. At Bridgewater, those key values are a drive for excellence, truth at all costs, a high sense of ownership, and strong character (by character, I mean the willingness to do the good but difficult things).
  2. Look for people who are willing to look at themselves objectively and have character.
  3. Recognize that the type of person you fit in the job must match the requirements for that job.

How People’s Thinking Abilities Differ

I believe, but am not certain about, the following:

  • There are two big differences in how people think that are due to the brain’s coming in two big halves and different people relying differently on them.

  • The left hemisphere reasons sequentially, analyzes details, and excels at linear analysis. Left-brained thinkers do these things well. They are also called linear thinkers. When they excel at this type of thinking they are called “bright.

  • The right hemisphere reasons holistically, recognizes themes, and synthesizes the big picture. Right-brained thinkers do these things well. People who think this way are also called lateral thinkers. Those who excel at this kind of thinking are called “smart.”

  • Some people see details (trees), and others see big pictures (forests). Those who “see trees” see the parts most vividly and don’t readily relate the parts to each other in order to see the big picture—e.g., they might prefer more literal, precise paintings. They are typically left-brained. Others connect the dots to pictures. In fact, they typically don’t even see the dots; they just see the pictures. They are typically right-brained. You can detect which type people are by observing what they focus on. Detailed thinkers can lose sight of the big picture and are more likely to focus in on a part than to go to the higher level and see the relationship between parts. For example, a person who focuses on details can be thrown off by word mistakes like “there“ instead of “their,” while big-picture thinkers won’t even notice the mistake.

  • Some people rely more on remembering what they were taught when making decisions, and others rely more on their independent reasoning. Let’s call the first group memory-based learners and the second group reasoning-based thinkers. When using the word “learning” I intend to convey “acquiring knowledge by being taught,” and when using the word “thinking” I mean “figuring it out for oneself.” Memory-based learners approach decision-making by remembering what they were taught. They draw on their memory banks and follow the instructions stored there. They are typically left-brained. Reasoning-based thinkers pay more attention to the principles behind what happens. They are typically right-brained.

  • Some people are focused on daily tasks, and others are focused on their goals and how to achieve them. Those who “visualize” best can see the pictures (rather than the dots) over time. They have a strong capacity to visualize and will be more likely to make meaningful changes and anticipate future events. They are the most suitable for creating new things (organizations, projects, etc.) and managing organizations that have lots of change. We call them “creators.” They are typically right-brained thinkers. By contrast, those who are focused on the daily tasks are better at managing things that don’t change much or require repetitive processes done reliably, and are typically best at doing clearly specified tasks. They see things much more literally and tend to make incremental changes that reference what already exists. They are slower to depart from the status quo and more likely to be blindsided by sudden events. They are typically left-brained thinkers.

  • Some people are “planners,” and others are “perceivers.” Planners like to focus on a plan and stick with it, while perceivers are prone to focus on what’s happening around them and more readily adapt to it. Perceivers see things happening and work backward to understand the cause and how to respond; they work from the outside in; they also see many more possibilities that they compare and choose from; often they see so many that they are confused by them. In contrast, planners work from the inside out, figuring out first what they want to achieve and then how things should unfold. Planners and perceivers have trouble appreciating each other. While a perceiver likes to see new things and change directions often, this is discomforting to planners, who prefer to stick to a plan. Planners weigh precedent much more heavily in their decision- making, and assume that if it was done before in a certain way, it should be done again in the same way, while perceivers tend to optimize on the spot. Planners are typically left-brained, and perceivers are typically right-brained.

  • Some people are driven more by their emotions, and others are driven more by their intellect.

HIRE RIGHT, BECAUSE THE PENALTIES OF HIRING WRONG ARE HUGE

  1. Weigh values and abilities more heavily than skills in deciding whom to hire.
  2. Remember that people tend to pick people like themselves, so pick interviewers who can identify what you are looking for.
  3. Pay attention to people’s track records. Dig deeply to discover why people did what they did.
  4. Look for people who have lots of great questions.
  5. Don’t hire people just to fit the first job they will do at Bridgewater; hire people you want to share your life with.

MANAGE AS SOMEONE WHO IS DESIGNING AND OPERATING A MACHINE TO ACHIEVE THE GOAL

  1. Understand the differences between managing, micromanaging, and not managing.
  2. Managing the people who report to you should feel like “skiing together.”
  3. Look down on your machine and yourself within it from the higher level. If you just saw your family without the perspective of seeing that there are millions of other families, and there have been many millions of other families over thousands of years, and observing how your family compares and how families evolve, you would just be dealing with the items that are coming at you as they transpire without the perspective.
  4. Connect the case at hand to your principles for handling cases of that type. Remember that every problem and task is just another “one of those”—i.e., another one of a certain type. Figuring out what type it is and reflecting on principles for handling that type of issue will help you do a better job.
  5. Conduct the discussion at two levels when a problem occurs: 1) the “machine” level discussion of why the machine produced that outcome and 2) the “case at hand” discussion of what to do now about the problem. Don’t make the mistake of just having the task-level discussion, because then you are micromanaging—i.e., you are doing your managee’s thinking for him and your managee will mistake your doing this as being OK, when that’s not OK (because you will be micromanaging). When having the machine-level discussion, think clearly how things should have gone and explore why they didn’t go that way.
  6. Don’t try to be followed; try to be understood and to understand others.
  7. Don’t try to control people by giving them orders.
  8. Communicate the logic and welcome feedback.
  9. Hold people accountable and appreciate them holding you accountable.
  10. Distinguish between failures where someone broke their “contract” from ones where there was no contract to begin with.
  11. Watch out for people who confuse goals and tasks, because you can’t trust people with responsibilities if they don’t understand the goals.
  12. Think like an owner, and expect the people you work with to do the same.
  13. Force yourself and the people who work for you to do difficult things.
  14. Don’t worry if your people like you; worry about whether you are helping your people and Bridgewater to be great.
  15. Avoid staying too distant. You need to know your people extremely well, provide and receive regular feedback, and have quality discussions. Your job design needs to build in the time to do these things.
  16. Vary your involvement based on your confidence. Management largely consists of scanning and probing everything for which you are responsible to identify suspicious signs. Based on what you see, you should vary your degree of digging, doing more of it for people and areas that look more suspicious, and less of it where probing instills you with confidence.
  17. Avoid the “theoretical should.” The theoretical should occurs when a manager theorizes that people should be able to do something when they can’t or without actually knowing whether they can do it.
  18. Escalate when you can’t adequately handle your responsibilities, and make sure that the people who work for you do the same.

PROBE DEEP AND HARD TO LEARN WHAT TO EXPECT FROM YOUR “MACHINE”

  1. Know what your people are like, and make sure they do their jobs excellently. This requires constantly challenging them and probing them. That’s true even if your people are doing their jobs well, even though those people can be given more leeway.
  2. Remind the people you are probing that problems and mistakes are fuel for improvement.
  3. Don’t “pick your battles.” Fight them all. If you see something wrong, even something small, deal with it.
  4. Don’t assume that people’s answers are correct.
  5. Make the probing transparent rather than private.

EVALUATE PEOPLE ACCURATELY, NOT “KINDLY”

  1. Maintain “baseball cards” and/or “believability matrixes” for your people.
  2. Know what makes your people tick, because people are your most important resource. Develop a full profile of each person’s values, abilities, and skills.
  3. Make this discovery process open, evolutionary, and iterative.
  4. Provide constant, clear, and honest feedback, and encourage discussion of this feedback. Don’t hesitate to be both critical and complimentary—and be sure to be open-minded.
  5. Look at patterns of behaviors and don’t read too much into any one event.

TRAIN AND TEST PEOPLE THROUGH EXPERIENCES

  1. Know that experience creates internalization. A huge difference exists between memory- based “book” learning and hands-on, internalized learning.
  2. Teach your people to fish rather than give them fish.
  3. Recognize that sometimes it is better to let people make mistakes so that they can learn from them rather than tell them the better decision.
  4. Train people; don’t rehabilitate them. Training is part of the plan to develop people’s skills and to help them evolve. Rehabilitation is the process of trying to create significant change in people’s values and/or abilities. Since values and abilities are difficult to change, rehabilitation typically takes too long and is too improbable to do at Bridgewater.

TO PERCEIVE, DIAGNOSE, AND SOLVE PROBLEMS...

  1. Understand that problems are the fuel for improvement.
  2. Don’t tolerate badness.
  3. “Taste the soup.” A good restaurateur constantly tastes the food that is coming out of his kitchen and judges it against his vision of what is excellent. A good manager needs to do the same.
  4. Have as many eyes looking for problems as possible. Encourage people to bring problems to you and look into them carefully.
  5. The people closest to certain jobs probably know them best, or at least have perspectives you need to understand, so those people are essential for creating improvement.
  6. Don’t use the anonymous “we” and “they,” because that masks personal responsibility—use specific names.
  7. The most common reason problems aren’t perceived is what I call the “frog in the boiling water” problem. There is a strong tendency to get used to and accept very bad things that would be shocking if seen with fresh eyes.
  8. In some cases, people accept unacceptable problems because they are perceived as being too difficult to fix. Yet fixing unacceptable problems is actually a lot easier than not fixing them, because not fixing them will make you miserable.
  9. Remember that a root cause is not an action but a reason. It is described by using adjectives rather than verbs. Keep asking “why” to get at root causes, and don’t forget to examine problems with people.
  10. Avoid “Monday morning quarterbacking.” That is, evaluate the merits of a past decision based on what you know now versus what you could have reasonably known at the time of the decision.
  11. Identify the principles that were violated. Identify which of these principles apply to the case at hand, review them, and see if they would have helped. Think for yourself what principles are best for handling cases like this. This will help solve not only this problem but it will also help you solve other problems like it.

DESIGN YOUR MACHINE TO ACHIEVE YOUR GOALS

  1. Remember: You are designing a “machine” or system that will produce outcomes.
  2. Beware of paying too much attention to what is coming at you and not enough attention to what your responsibilities are or how your machine should work to achieve your goals.
  3. Don’t act before thinking. Take the time to come up with a game plan.
  4. Think about second- and third-order consequences as well as first-order consequences.
  5. Everyone must be overseen by a believable person who has high standards. Without this strong oversight, there is potential for inadequate quality control, inadequate training, and inadequate appreciation of excellent work. Do not “just trust” people to do their jobs well.
  6. Constantly think about how to produce leverage. For example, to make training as easy to leverage as possible, document the most common questions and answers through audio, video, or written guidelines and then assign someone to regularly organize them into a manual. Technology can do most tasks, so think creatively about how to design tools that will provide leverage for you and the people who work for you.
  7. You should be able to delegate the details away. If you can’t, you either have problems with managing or training or you have the wrong people doing the job.
  8. Tool: Maintain a procedures manual.
  9. Tool: Use checklists.

TO MAKE DECISIONS EFFECTIVELY...

  1. Embrace the power of asking: “What don’t I know, and what should I do about it?”
  2. While everyone has the right to have questions and theories, only believable people have the right to have opinions.

MAKE ALL DECISIONS LOGICALLY, AS EXPECTED VALUE CALCULATIONS

  1. Recognize opportunities where there isn’t much to lose and a lot to gain, even if the probability of the gain happening is low.
  2. Don’t bet too much on anything. Make 15 or more good, uncorrelated bets.

REMEMBER THE 80/20 RULE, AND KNOW WHAT THE KEY 20% IS

  1. Distinguish the important things from the unimportant things and deal with the important things first.
  2. Don’t be a perfectionist, because perfectionists often spend too much time on little differences at the margins at the expense of other big, important things. Be an effective imperfectionist.
  3. Don’t mistake small things for unimportant things, because some small things can be very important (e.g., hugging a loved one).
  4. Remember that the best choices are the ones with more pros than cons, not those that don’t have any cons. Watch out for people who tend to argue against something because they can find something wrong with it without properly weighing all the pros against the cons. Such people tend to be poor decision-makers.
  5. Understand the concept and use the phrase “by and large.” Too often I hear discussions fail to progress when a statement is made and the person to whom it is made replies, “Not always,” leading to a discussion of the exceptions rather than the rule.
  6. When you ask someone whether something is true and they tell you that “It’s not totally true,” it’s probably true enough.