SYNOPSIS

How did Ray Dalio, the child of an ordinary medium-class family create the world’s largest, and most successful hedge fund, currently managing over $150 billion USD? In a word: principles.

Ray Dalio created a set of principles for personal and professional life that serves as an operating system for living based on radical honesty and radical transparency thriving within an idea meritocracy. An idea meritocracy is “a system that brings together smart, independent thinkers and has them productively disagree to come up with the best possible collective thinking and resolve their disagreements in a believability-weighted way.” To “believability-weight” something means to determine an idea’s legitimacy based on the track record and the ability of the idea’s originator to clearly explain their concept. Dalio believes an idea meritocracy is the best decision-making system because it requires honesty and leads to continual improvement.

Dalio divided his principles into Life Principles and Work Principles. The life principles apply to individual success, and the work principles guide group success.

Dalio decided to share his principles to help others succeed. His goal is to inspire people to discover and write their principles and to refine them through experience and reflection. Dalio believes good, experience-tested principles can lead people to better decisions, more mutual understanding, and superior outcomes.

SUMMARY

Part I: Where I’m Coming From

Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund by assets, attributes his success to a set of “principles” learned throughout his life. Principles are the essential learnings of life that are absolute truths that withstand the test of time. It is for this reason that Ray Dalio enjoys learning about neuroscience, human evolution, and how the mind works. The truths of these topics do not change with time.

Dalio’s humble beginnings in an ordinary middle-class family required that he be quite practical and realistic if he wanted to succeed in life, especially in the financial sector. The financial industry is dominated by time series. A time series of ever-changing asset prices—as the price of stocks, bonds, commodities, and foreign currencies, among others change, it is very important to identify the cause–effect or the root cause that leads to the price change. Often the root cause may be hidden under layers of assumptions, mistakes, and human error. It is for this reason that Dalio created his “principles.” These principles allowed him to manage his hedge fund in such a way to quickly identify the root cause of any mistakes and to implement parameters to prevent such errors from happening again.

Dalio considers his mistakes as some of his most important life experiences because they led him to discover the principles that now guide his decision-making. By reflecting on his mistakes and turning those lessons into principles, Dalio eventually reached and surpassed his goals. Dalio believes that every decision is within an individual’s control, so with practice, careful reflection, and the application of certain principles, anyone can greatly improve their decision-making process.

BE A STUDENT OF HISTORY

Once, following an international currency devaluation, Dalio expected the stock market to plummet, and he took what he thought was an appropriate position. Instead, the stock market jumped significantly, causing him to nearly go bankrupt. To prevent such a mistake happening again, he set out to identify the principles he needed to put in place and studied past currency devaluations from the beginning of time to the present to see what lessons he could learn. He learned that what had just taken place had happened before many times in the past. Dalio calls these moments in history “another one of those” moments, meaning that most everything has happened many times before and will surely happen again. Perhaps the last time an event occurred was before our lifetime, despite it being the first time we have experienced it. Most events we experience have already happened multiple times in the past. As a consequence, if our human psychology has not changed in the last thousand years, then by studying the past we should be able to predict the future by finding “another one of those” earlier events.

WRITE IT DOWN

Writing the principles down is important for reflecting on and refining them. Whenever Dalio makes an investment, he writes down the criteria used in making his decision. At the conclusion of the trade, he will reflect on how well the criteria worked. Similarly, for any given mistake, he will write about it, reflect on why it happened, and then determine how to take corrective action to avoid making the same mistake again. Taking this method to the next level, Bridgewater was one of the first hedge funds to use computer algorithms to trigger trades. The set of criteria Dalio uses today are algorithmic in nature.

ALPHA-OVERLAY INVESTING

Over time, Dalio created different investment instruments based on his principles. One of these is the “alpha overlay” form of investing, where “alpha” means the “active return on investment relative to the stock market” and “beta” is defined as the overall market performance. Bridgewater defined “alpha” to identify a truth— that being, how much better were they doing relative to the stock market in general.

The result was a way of investing independent of the underlying market performance. In creating alpha overlay as an investment management style, Dalio learned that part of being a successful investor involves only taking highly confident bets and then diversifying those bets well. Though alpha overlay is a common technique used today, it was his principles that allowed Bridgewater to invent the term and seek out a truth about their performance.

THE “HOLY GRAIL OF INVESTING” AND RISK PARITY

Dalio found a proven way to diversify by ensuring that investments are uncorrelated. As shown in the graph below (p. 57), fifteen to twenty good, uncorrelated return streams can significantly reduce risks without reducing expected returns. Though Bridgewater did not invent this technique, they turned to academic papers to identify how to mitigate their risks.

Later in his career, Dalio worked with colleagues to create the best asset allocation mix for preserving wealth over generations. Known as “risk parity” investing, it involves ensuring a mix of assets that are positioned to do well in all economic environments. When the “risk parity” method was created, Dalio invested his savings in the algorithm that defined the “risk parity” product—within a few years, his clients wanted to use the same tool, and in no time the product had over $3 billion USD. Dalio attributes the “risk parity” product he developed to his principles. On many occasions, Dalio has mentioned that it is solely due to his life and work principles that Bridgewater has become the success it is today.

SYSTEMIZING LEARNING FROM MISTAKES

It pays to learn from mistakes:

Bridgewater actively uses an “Issues Log” to track mistakes and ensure employees learn from them. Anything that goes wrong is recorded in the issue log, including who is responsible for the problem. The issue log also allows for diagnosing problems and tracking performance. At Bridgewater, if a mistake happens or if there is an error, it is OK so long as it is documented in the issue log and research is carried out to identify its root cause. If the mistake or error is not logged, that’s when people could get fired.

The success of this tool inspired Dalio to create other tools, many of which Bridgewater has since adopted, such as “Baseball Cards” of each employee. Here, Bridgewater collects data on employees through reviews, tests, and by tracking individual choices. The company uses an algorithm, the results of which are reviewed by people for objectivity and believability in order to create a profile or “baseball card” for each person.

The baseball cards were created because Dalio identified a work principle (see below) which dictated that the type of solution to a given problem type depends on the type of individual assigned to solve the problem. For example, if a scientific person is assigned to a scientific problem, the outcome of the solution can be more likely determined. However, if an artistic person is assigned to a scientific problem, the outcome will be different– perhaps more qualitative than quantitative. Given this principle, Bridgewater uses the baseball cards to determine the type of outcome they can expect from giving an employee a specific problem.

Dalio recognized how important tools could be in reinforcing Bridgewater’s principles. Others could also learn from Bridgewater and identify common, recurring problems as opportunities to craft solutions for their organizations that can be systematized and implemented via truth-based principles and tools that reinforce and execute such principles.

Part II: Life Principles

HOW TO DEVELOP PRINCIPLES

All successful people operate on principles, but perhaps they do not realize it. Principles can be anything, as long as they are authentic, i.e., a reflection of a person’s true character and values. Principles allow for proactive planning and decision-making. Dalio likens a good set of principles to a collection of recipes for success.

Dalio’s Life Principles are the overarching principles that guide his approach to everything. They apply to any scenario, including personal life, nature, business, and policy. Learning effective principles requires studying cause–effect relationships and patterns, as well as understanding reality, embracing it, and, importantly, dealing with it. To create, use, and improve such principles, one should:

1. Slow down and note the criteria being used to make a decision.
2. Write the criteria down in the form of a principle.
3. Think about those criteria the next time there is an outcome to assess, and refine them before “another one of those” moments comes along.

THINK FOR YOURSELF

Dalio’s first principle is to self-evaluate. Each person should ask themselves:

1. What do you want?
2. What is true?
3. What are you going to do about it?

To self-evaluate scenarios, Dalio practices transcendental meditation, also known as TM. While meditating, he replays past events, identifies the lessons he needs to gain truths from the experience, and implements actions that can guarantee that the next time the same scenario happens, he will perform better.

PRINCIPLES TO: EMBRACE REALITY

1. BE A HYPERREALIST

A hyperrealist balances their dreams with reality and a determination to achieve success. It’s good to be a hyperrealist.

Savoring life and making an impact are not necessarily mutually exclusive, but overall, one has to sacrifice a lot of time and thinking to identify new principles. Truths, which are the foundation of principles, are hidden all around us. To discover them, one needs a scientific approach by being a hyperrealist.

2. TRUTH IS THE ESSENTIAL FOUNDATION FOR ANY GOOD OUTCOME

Ignoring reality when it does not reflect what a person wants is foolish. It is important to understand and deal with bad situations, and it is impossible to benefit from other principles without first following this principle.

3. BE RADICALLY OPEN-MINDED AND RADICALLY TRANSPARENT

To be radically open-minded:

1. Appreciate the art of thoughtful disagreement.
2. Triangulate your view with believable people who are willing to disagree.

“Thoughtful disagreement” is when both parties are motivated by the genuine fear of missing important perspectives. The ability to have thoughtful disagreement depends on whether the individuals in the conversation are open- or closed-minded. Thoughtful disagreement can only exist when individuals are open-minded.

Individuals can become more open-minded by:

1. Regularly using pain as a guide toward quality reflection.
2. Making being open-minded a habit. For example, use feelings of anger/frustration as warning signs to calm or slow down.
3. Identifying blind spots, which are ways of thinking that prevent seeing things accurately and completely, and that typically lead to bad decisions.
4. Learning to listen to believable people when they say something is wrong. This guards against personal bias and encourages more objective thinking.
5. Meditating. Dalio recommends transcendental meditation.
6. Being evidence-based and encouraging others to be the same.

4. LEARN FROM NATURE, CONTINUE EVOLVING, AND BE A GOOD PERSON

Nature operates on a system of higher-level consequences. People tend to overemphasize first-order (short-term) consequences while underestimating or ignoring second-, third-, and subsequent-order (longer term) consequences. For example, in working to improve one’s health and fitness, the first-order consequences of exercise are the pain and time spent working out. The second-order consequences are looking and feeling better as a result of the exercise, and are the desired goals that take longer to realize.

Evolution is a permanent, powerful force that drives everything. It can also be life’s greatest reward. Given evolution’s staying power, each person must continually evolve to stay ahead. Rapid trial and error, learning, and change through action are essential to evolving effectively.

Being a good person means operating consistently with the laws of reality while contributing to the evolution of the whole.

5. PAIN + REFLECTION = PROGRESS

“Bad times coupled with good reflections provide some of the best lessons.”

Pain serves a valuable purpose: it keeps people alert and moving in the right direction. Many people try to avoid it, whether it is physical or emotional (e.g., frustration, sadness, shame). However, pain is unavoidable, especially in the pursuit of an ambitious goal. The presence of pain can even be positive; it is an indicator that a new solution is needed to move forward.

Developing the habit of reflecting on pain is essential to making progress. The ideal time to reflect and draw key lessons is while experiencing pain. This is difficult, so reflecting after the pain subsides is also helpful. Bridgewater addresses these conflicting benefits by using a “Pain Button”. The Pain Button is an application designed for people to record emotions as they feel them, and then to return to them later to reflect on them through guided reflection questions. Users specify what they will do to address the situation. The tool tracks the frequency and cause of pain as well as whether action steps are taken, and their effectiveness.

6. OWN YOUR OUTCOMES

“Whatever circumstances life brings you, you will be more likely to succeed and find happiness if you take responsibility for making your decisions well instead of complaining about things beyond your control.” Doing this is called having an “internal locus of control,” and people who have such control outperform those who do not.

7. CONFRONT WEAKNESSES

Once weaknesses are identified, there are four choices to manage them:

1. Deny the weaknesses. Most people do this and it is the worst choice.
2. Accept the weaknesses and work to convert them into strengths. This is usually the best path, if it works! A good way to know whether this will work is to consider whether the steps necessary are consistent with your nature and natural abilities.
3. Accept the weaknesses and find ways around them. This is the easiest and often most viable path, but the one least followed.
4. Change your goals. This is a good option for people willing to be flexible.

To confront weaknesses:

1. Do not confuse what you wish were true with what is really true.
2. Do not worry about looking good—worry instead about achieving your goals.
3. Do not overweight first-order consequences relative to second/third-order ones.
4. Do not let pain stand in the way of progress.
5. Do not blame bad outcomes on anyone but yourself.

The “5-Step Process” to Get What You Want Out of Life

1. Have clear goals.
2. Identify problems standing in the way of achieving your goals. Don’t tolerate them.
3. Accurately diagnose the problems to get at their root causes.
4. Design plans to get around them.
5. Do what is necessary to push these designs through into results.

Weaknesses Don’t Matter if You Find Solutions

First, having humility to get what’s needed from others is essential. Next, look for patterns in any mistakes made and identify which steps in the above “5-Step Process” they belong to. Then, write down at least one big weakness and why it exists. Finally, fix it yourself or find help from others to fix it.

PRINCIPLES TO: BE RADICALLY OPEN-MINDED

1. RECOGNIZE YOUR TWO BARRIERS

The two barriers to making good decisions are your ego and blind spots. Ego is what makes it hard to accept weaknesses and mistakes because different parts of the brain fight to control how open-minded a person is, while blind spots are areas where a way of thinking precludes seeing a situation accurately.

The ways to adapt and overcome ego and blind spots are to:

1. Teach the brain to work in ways that don’t come naturally.
2. Use compensation mechanisms, such as programmed reminders.
3. Rely on others for help who are strong in areas where a personal weakness exists.

2. PRACTICE RADICAL OPEN-MINDEDNESS

Radical open-mindedness is the ability to consider different points of view and to explore different possibilities without letting ego or blind spots get in the way. Having a genuine concern for not seeing choices optimally can motivate an active, regular practice of radical open-mindedness. Replace the need to always be right with the joy of learning what’s true. With practice, anyone can acquire this ability.

To be radically open-minded:

1. Sincerely believe that you might not have the best answers and recognize that the ability to deal well with not knowing the answer is more important than knowing the answer.
2. Recognize that decision-making is a two-step process of (1) taking in all the relevant information, typically called “learning,” and (2) deciding.
3. Don’t worry about looking good; instead, worry about achieving goals.
4. Realize that you can’t be productive or contribute effectively without first learning.
5. Empathize by temporarily suspending judgment.
6. Remember to look for the best answer, not just the best answer you come up with yourself.
7. Know when to argue and when to seek to understand. Decide which is most appropriate based on the knowledge of each person involved.

PRINCIPLES TO: LEARN HOW TO MAKE DECISIONS EFFECTIVELY

The biggest threat to good decision-making is harmful emotions. Decision-making is a two-step process of learning, then deciding. To learn means to be able to accurately assess reality. Getting an accurate picture of reality requires an accurate synthesis, the process of converting a lot of data into an accurate picture, and knowing how to navigate different levels of reality.

1. SYNTHESIZE WELL

1. Synthesize the situation at hand: Determine which facts are important and which ones are not. Find reliable and experienced individuals familiar in the space in question and ask them whatever information is needed. Take a step back from the situation to gain perspective. Sometimes, allowing some time to pass before making a decision helps. Avoid fixating too much on any one piece of information.
2. Synthesize the situation through time: Collect, analyze, and sort different types of information, categorizing outcomes by type and quality. Graph the results over time, and patterns will emerge. Keep in mind the rates of change and the levels of improvement, and how the two are related. An acceptable rate of improvement depends on the rate of change, e.g., an improvement with too slow a rate of change is not sufficient. Use the 80/20 Rule to avoid getting dragged into unnecessary detail: 80% of value comes from 20% of the effort or information.
3. Navigate levels effectively: Reality exists at different levels and each gives a different but valuable perspective. Keep all levels in mind while synthesizing and deciding.

2. MAKE DECISIONS AS EXPECTED VALUE CALCULATIONS

Every decision can be thought of as a bet, with a probability and reward for being right, and a probability and penalty for being wrong. The expected value for the reward portion is the reward times the probability of it occurring. Likewise, the expected value for the risk component is the penalty times its probability of occurring. A good decision is one where the reward’s expected value is greater than the penalty’s. The best decision is the one with the highest expected value. Raising the probability of being right is valuable no matter how high that probability already is. Even the best choices have a few cons, so the existence of cons doesn’t necessarily make a choice bad.

3. WEIGH THE VALUE OF ADDITIONAL INFORMATION AGAINST THE COST OF NOT DECIDING

Constantly evaluate the marginal benefit of having more information against the marginal cost of waiting to decide. Separate the “must-dos” from the “like-to-dos” and ensure that all the “must-dos” are above the bar and on track before addressing the “like-to-dos”. Similarly, make time for the important things such that it becomes okay if you don’t have time to deal with the unimportant. Keep everything in perspective and avoid mistaking possibilities for probabilities. Weight everything up in terms of its likelihood and prioritize accordingly.

4. WEIGH DECISIONS ACCORDING TO BELIEVABILITY

Triangulate decisions with “highly believable” people—those with an established track record who can clearly explain their point—willing to have a thoughtful disagreement to enhance the quality of the decisions being made. Avoid valuing one’s own believability more than is logical. Practice distinguishing between who is more or less credible and how to tell the difference. When disagreements arise, start by trying to agree on the principles used to make the decision, and explore the merits of the reasoning behind each principle.

5. CONVERT PRINCIPLES INTO ALGORITHMS

Using computers to make decisions through algorithms powered by principles, in parallel with one’s own thinking, will exponentially increase the power of the decisions made and compound one’s own rate of learning. By using a computer, emotions, such as bias and panic, can be avoided.

Part III: Work Principles

Dalio’s “Work Principles” are essentially the “Life Principles” applied to groups. Dalio believes that the work principles are even more important than the life principles because “the power of a group is so much greater than the power of an individual.” The work principles’ target audience is those who view work as a means of following a passion and achieving a mission.

MAKE WORK AND PASSION ONE AND THE SAME

Dalio’s most fundamental work principle is to make work and passion one and the same and to do it with people one wants to be with.

AN ORGANIZATION IS A TWO-PART MACHINE

An organization is a machine with two major parts: people and culture. Each influences the other: the people determine an organization’s culture, and the culture determines the kinds of people who will thrive there. Great organizations have both great people and great cultures. Getting both right is the most difficult yet most important task of a leader.

Great people have great character (they’re truthful, transparent, and committed) and great capabilities (able to excel at their jobs). Great cultures address problems and disagreements directly and solve them well.

USE TOUGH LOVE

Tough love means pointing out mistakes and weaknesses. It is the hardest and most important type of love to give. People may prefer compliments, but accurate and fair criticism is more valuable to their growth and success.

AN IDEA MERITOCRACY IS THE BEST SYSTEM

An idea meritocracy consists of:

• Radical truth
• Radical transparency
• Believability-weighted decision-making.

Bridgewater operates as a principles-based idea meritocracy. The staying power of an idea meritocracy lies in its sheer effectiveness. Dalio credits his principle-driven approach to not only improved economic, investment, and management decisions, but also to better decisions in “every aspect” of life.

“Believability-weighted decision-making” is an essential part of the idea meritocracy, and is centered around a concept of “believability”. “Believable people are those who have a strong track record with at least three successes—and have great explanations of their approach when probed.” A central question to believability-weighting is to ask: how do I know I’m/they’re right?

To guide the best decision-making, find the most believable people who disagrees with an idea and try to understand their thinking. Pay less attention to a person’s conclusion and more to the reasoning that led to it. In addition to encouraging humility, believability-weighted decisions increase the chances of being right.

To enhance the power of an idea meritocracy, systemize the process of believability-weighted decision-making through the use of computer algorithms and back-testing.

TRUST IN RADICAL TRUTH AND RADICAL TRANSPARENCY

Radical truth and radical transparency are essential to creating a real idea meritocracy. However, adapting to radical truth and transparency takes time and is difficult. This is because each person has “two yous.” There is the logical and conscious “you,” and the emotional and subconscious “you.” These “two yous” often work in conflict with each other. While the conscious, “upper-level” you understands the benefit of radical truth and radical transparency, the subconscious, “lower-level” you is skeptical, impatient, and easily frustrated. Adapting can take about eighteen months.

MEANINGFUL RELATIONSHIPS AND MEANINGFUL WORK ARE MUTUALLY REINFORCING

The most meaningful relationships are those where people can speak honestly about important matters, learn together, and be open to hold one another accountable to be excellent. Having this type of relationship with coworkers helps people get through challenging work. Meanwhile, the challenging work leads to closer and stronger relationships. This cycle is self-reinforcing and creates success, as shown in the triangle diagram below (p. 337):

CULTIVATE MEANINGFUL WORK AND MEANINGFUL RELATIONSHIPS

After establishing a common mission, be loyal to it and watch out for those not operating in concert with it. Ensure everyone is on the same page about expectations and what things are non-negotiable. One non-negotiable item is that people must give more consideration to others than to themselves. To be considerate means to allow others to do what they want, as long as it’s consistent with the company’s principles and the law, and to be willing to put others ahead of oneself. Understanding the difference between fairness and generosity is important too. Not every generous act needs to be equal. On the management side, determine what is fair and be on the far (generous) side of it, including making sure that employees are well paid.

Be aware that the size of an organization can hurt or prevent meaningful relationships. As a company grows, it needs to carefully consider how to maintain a sense of community. For Bridgewater, having departments of 50–150 people helped maintain their sense of community even as they grew.

CREATE A CULTURE IN WHICH IT IS OKAY TO MAKE MISTAKES AND UNACCEPTABLE NOT TO LEARN FROM THEM

While everyone makes mistakes, the difference is successful people learn from their mistakes and unsuccessful people don’t. Directly address mistakes. A work environment where it is okay to safely make mistakes that can be learned from leads to rapid progress and less mistakes over time.

Observe mistakes for patterns. Write down mistakes and infer connections between them. Then identify the biggest, most common weakness, known at Bridgewater as the “one big challenge.”

No one can see themselves objectively, so everyone should help others learn what is true about themselves by providing honest feedback, by holding them accountable, and by working through disagreements in an open-minded way. The worst mistake someone can make is not owning up to their mistake. Penalize people who cover up mistakes, and foster a culture in which highlighting a mistake is normal.

PRINCIPLES TO: GET AND STAY IN SYNC

People need to be aligned in terms of their shared mission, treatment of one another, and shared understanding of their work responsibilities. Alignment is important to any idea meritocracy and must be conscious, continuous, and systematic.

1. CONFLICTS ARE ESSENTIAL FOR GREAT RELATIONSHIPS

Disagreements help determine whether the principles are aligned and lead to a more constructive resolution of differences. Getting in sync through productive conflict and discussion saves time in the long run.

2. KNOW HOW TO GET IN SYNC AND HOW TO DISAGREE WELL

The key is to know how to move from disagreement to making decisions. To do so, surface the areas of disagreement, either formally in writing or informally in discussion. Not all complaints are worth discussing, so focus on those that are constructive. Always try to see the other sides to a story.

3. BE OPEN-MINDED AND ASSERTIVE AT THE SAME TIME

Getting in sync involves two attributes: assertiveness and open-mindedness. To be open-minded is to see things through another’s eyes. To be assertive is to clearly communicate how one sees things through one’s own eyes. To encourage open-mindedness, use the two-minute rule in meetings: allow the speaker two minutes uninterrupted to explain their thinking. Anyone can become more open-minded and assertive with practice, training, and reinforcement.

PRINCIPLES TO: GET BEYOND DISAGREEMENTS

Sometimes people can’t agree on what’s true and what to do about it. In these instances, Bridgewater follows a set of procedures for believability-weighted voting that enforces the outcome. Below are ways to proactively manage disagreements.

1. PRINCIPLES CAN’T BE IGNORED

Treat principles like laws. Apply the same standard to everyone, i.e., the same levels of open-mindedness, consideration, and integrity. Hold everyone accountable to the principles.

2. DON’T CONFUSE THE RIGHT TO COMPLAIN, GIVE ADVICE, AND OPENLY DEBATE WITH THE RIGHT TO MAKE DECISIONS

Everyone has their role, responsibilities, and authority based on their demonstrated ability. Challenging and probing individuals and managers alike can improve thinking and provide alternative perspectives. Advice and debate move throughout the hierarchy, but the decision-making authority does not transfer.

3. DON’T LEAVE IMPORTANT CONFLICTS UNRESOLVED

The long-term consequence of avoiding confrontation is “massively destructive.” Avoid the “narcissism of small differences”, i.e., avoid allowing little differences to divide when in agreement on the big things. Don’t get stuck in disagreement. Vote on it as a group or risk escalating the matter.

4. SUPPORT A DECISION ONCE IT IS MADE, REGARDLESS OF THE INDIVIDUAL DISAGREEMENT

When those in a group who don’t get what they want continue to fight, the group fails. The cohesion of the group always supersedes individual desires.

PRINCIPLES TO: HIRE RIGHT

1. HIRE TO THE DESIGN

Avoid creating jobs to fit certain people. Instead, match people to the design of the company by listing a consistent set of criteria reflecting which values, abilities, and skills are needed. Hiring for values is most important. Values are deeply held beliefs that motivate behavior and influence how compatible a person is to working with others. Abilities are the second most important, and cover the ways of thinking and behaving. Skills are the least important, though obviously still important. They are learned tools (e.g., writing computer code, speaking a foreign language). Values and abilities rarely change, while skills can be acquired.

2. MAKE HIRING THE RIGHT PEOPLE SYSTEMATIC AND SCIENTIFIC

Hiring should be systematic and evidence-based. Capture data and keep track of interview questions and answers to build a record for future hiring efforts.

3. HIRE PEOPLE FOR THE LONG TERM

Hire the type of people that can share in the long-term mission. To identify these people, look for those who ask many thoughtful questions. Show them what the company is really like, especially the bad and the most challenging aspects. Find people who are compatible with and capable of challenging others. Be generous with them and expect generosity in return. Mutual generosity will lead to a quality relationship.

PRINCIPLES TO: CONSTANTLY TRAIN, TEST, EVALUATE, AND SORT PEOPLE

1. ALLOW YOUR HIREES TO EVOLVE

Excellence is best for everyone; achieving and maintaining excellence means ensuring the right people are in the right roles. It takes six to twelve months to get to know a new employee, and about eighteen months for them to adapt fully to the culture. During this time, provide mini-reviews and some major ones. After each assessment, give the employee new assignments that build on their likes/dislikes and strengths/weaknesses as well as on the training and feedback they’ve received. Emphasize hands-on learning, which is better than book learning. Make it an iterative process that either leads to either increasing responsibility or a parting of ways.

2. PROVIDE CONSTANT FEEDBACK AND EVALUATE ACCURATELY

Most training should consist of doing a task and then analyzing performance. The feedback should be a realistic reflection of what is working and what is not. There need not be a balance of criticisms and compliments. Accuracy is the best form of kindness, even when it feels like an attack.

Greatness comes from focusing on where improvements are needed. Therefore, accurate criticism is more valuable than compliments. While it is important to tell people where they are excelling, it is even more important to highlight their weaknesses and ask them to reflect on them.

The two biggest mistakes with assessing people are: (a) being overconfident in the assessment and (b) failing to get in sync about it. To avoid these pitfalls:

1. Assess in nonhierarchical ways that encourage everyone to speak freely.
2. Learn about each other through candid conversations about mistakes and their root causes.
3. Help people work through the pain that comes from confronting weaknesses by communicating calmly, contextualizing the feedback, and giving the person time and space to process before having a follow-up conversation.
4. Most importantly, to help people succeed do two things: allow them to see their failures so clearly that they are genuinely motivated to change, and then show them how they can change or work with others who are strong where they are not.

Conclusion

MANAGE AS IF OPERATING A MACHINE TO ACHIEVE A GOAL

For every case that emerges, a manager should have two purposes:

1. To move closer to a goal, but not to fixate only on this part as many people mistakenly do.
2. To train and test the machine (i.e., the people and designs). This second part is more important than the first because building a good, lasting organization that thrives in all cases depends on it.

Daily updates are an effective tool for keeping up with what a manager’s team is doing and thinking. As part of the probing, “probe to the level below the people who report to you.” Observing a direct reporting team ensures an understanding of how the person who reports to a manager adds value to the machine. Furthermore, the individuals who report to the managers who report to you should feel comfortable escalating their problems to you. In some organizations, this is frowned upon, but at Bridgewater, this helps create upward accountability.

WHAT IS WORK?

People should view work as an opportunity to achieve a combination of three things:

1. To accomplish a desired mission together in bigger and better ways than one could do alone.
2. To develop quality relationships that together make for a great community.
3. To earn money to buy what’s wanted and needed for oneself and others.

The above are mutually supportive. It’s up to each person to decide how much of each they want.