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Ray Dalio’s Secret Sauce – The Truth Machine and The Good Life

This is Ray Dalio; he has built one of the greatest money making machines the world has ever seen:

Ray Dalio has written a book titled Principles. The book is over 500 pages. It’s mostly words, and there are no wizards, so a lot of people won’t read it which I think is a shame.

The good news is that the core theme of Dalio’s book can be boiled down to the following formula:

But why should you listen to Ray Dalio at all? And does his formula work? As an introduction to Principles, I’ll use what Dalio calls the secret to his success to try and answer those questions.

THE TRUTH MACHINE

According to Dalio, the secret to his success is something he calls Believability Weighted Decision Making. This is a fancy way of describing what I’ll be calling Ray Dalio’s Truth Machine. Here’s what it looks like:

FIND OUT WHO’S BELIEVABLE

Using the Truth Machine is a three-step process, and the first step is finding believable people to listen to. Because we’re looking at just Dalio’s opinion, our first step is to determine how believable he is.

To determine how believable someone is, we need to ask ourselves,

“Does the person making the argument have a track record of success and/or expertise concerning the subject matter?”

The better the track record, the more believable the person.

It’s worth mentioning that most people find Ray Dalio believable because of his professional track record. Specifically, because Dalio has accomplished two objectively difficult things:

  1. He and his team at Bridgewater have delivered market-beating returns for the past 30 years.1
  2. He built (from scratch) the world’s largest hedge fund, Bridgewater Associates which currently manages ~$140 billion of assets.2

Thus, Dalio is believable when it comes to the topics of investing, leadership and achieving your goals. But great professional success doesn’t always mean a fulfilled life. The question is whether or not Dalio has achieved a good life using his formula.

Because it’s nearly impossible to take a reliable measure of another person’s subjective experience, the best evidence of a track-record we have is Dalio’s own report about his life. And according to him, he’s lead an extremely fulfilling life full of meaningful work and meaningful relationships.

For me, Dalio’s report on his own life in combination with a track-record as someone who can achieve difficult goals is enough to consider him a believable person.

Open Minded Critical Thinking

After we’ve gathered believable people’s opinions, the Truth Machine process requires that all these believable people turn their brainpower toward critically and open-mindedly evaluating the logic of each other’s opinions. Critical thinking is necessary because even a person with a great track-record can be wrong.3 And sometimes a person with no track record can be right.4

While getting a group of smart people in a room together and having them open-mindedly search for the best ideas sounds good on paper, it’s worth pausing for a moment and consider how rare it is for this to actually happen.

It’s rare is because we don’t just have an idea and then carry it along with us independent of ourselves.




What does happen is that our ideas get wrapped up in our feelings and egos. So when we have ideas, we grow attached to them in a way that turns them from just thoughts in our heads to extensions of our self-worth.5

The result is that when people come together in the real world, they come to fight for their ideas, instead of looking for the best idea.

Because it goes against fundamental aspects of human nature, this is the hardest step in the Truth Machine to get right. Asking people to be critically open-minded about their best ideas is like asking master craftsmen to bring their best work to a contest where they know that if it’s not chosen as the winner, it will be destroyed.

A large part of Dalio’s success as an investor has been the result of training himself and other people to be open-minded enough to engage in just this type of process. 

Dalio’s Good Life Formula

Critical thinking means examining the underlying logic of other’s ideas. So that you can apply your critical thinking to Dalio’s opinion, I’m going to try and provide a quick and dirty explanation of his reasoning.

The first principle in Dalio’s formula is that a good life is a life full of things you value. For example, Dalio’s values are meaningful work and meaningful relationships.

Your values may be money and nice cars, and that’s ok. What is important is that you make an effort to truly know yourself in order to accurately diagnose what your values are.

Once you understand your values, the next step is to set goals that will bring these values into your life. A goal could be an amount of money, a change you want to see in the world or a job you’d like to have.6

As we all know, goals don’t just happen. Therefore the next step is to craft processes to achieve our goals. Our ability to achieve our goals comes down to two factors, our decisions, and luck. Since by definition we cannot control luck, the question of achieving our goals becomes how to make the best decisions. Good decisions, Dalio argues, can only be achieved by accurately understanding how the world works.

For example, if we want to bet on the results of a coin toss, our best method for making good decisions (bets) will be figuring out whether the coin is fair (a 50/50 chance of heads or tails) or weighted in some other way that skews the odds of the results.

As in life, the result of any single toss will have an element of luck but over many coin tosses, the weighting of the coin will act as a signal that overcomes the noise of luck.

Dalio believes that most people’s biggest obstacle to understanding how the world works is not a lack of intelligence, but a tendency to avoid confronting painful realities. When confronting the reality of the world would violate a long-held belief or entail a truth about ourselves that we don’t want to face, we avoid acknowledging the truth to protect our ego’s.

 

When we turn away from reality and make decisions based on a flawed model of how the world works. The result is decisions based on fantasy that presumes the world is one-way when really, in the immortal words of Marlo Stanfield, “it’s the other way.”  

As I hope you can see, the Truth Machine plays an integral role in Dalio’s process for getting around ego and confronting reality so that he can make good decisions, achieve his goals, get things he values, and have a good life.

 

Take A (Believability Weighted) Vote

The final step in the Truth Machine’s process is to put believable people’s opinions to a vote. But it is not a normal one, man, one vote situation. Instead, each person’s vote is weighted by their believability. More believable people’s votes count for more and less believable people’s count for less.

Each person’s weighted vote is tallied up and the opinion or course of action with the most votes selected and voila! You have a truth machine decision. 

Although it may seem a little strange at first, believability weighted voting really just a more formal way of expressing what we do in ordinary life.

For example, if you’d never studied physics and need the right answer to a physics problem, you would value someone with a degree in physics opinion much more highly than your own. In fact, you’d value their opinion so highly that even if their answer didn’t make sense to you, you’d probably use their opinion over yours.  7

When it comes to physics, it’s easy to see that only an idiot would believe the best answer was already in their own head. That’s because we understand that physics is difficult and complex. But when it comes to other areas like relationships, careers, politics and investing, we tend to presume that we can come up with the best answers on our own. And of course, that’s where we get into trouble.  

Unfortunately, we can’t take a believability weighted vote on Dalio’s formula. But you can make your opinion heard in the comments, or discuss it with your friends to get more than just your own opinion on the subject. 

The Best Worst Truth Machine

In an ideal world, by using the Truth Machine, every decision would reflect the truth about how the world works. But of course, even the Truth Machine isn’t perfect. As Dalio would be the first to admit, all the Truth Machine does is get you closer than any other system he has found.

Most of us go through life using only our own brains to make our decisions. The insight that’s made Dalio a billionaire has been to realize that his own brain isn’t that great and that that’s ok. It’s ok because he’s discovered that if he can get a lot of pretty good brains together and train them to only care about the best answer, they can get a much better view of how the world works than he ever could on his own. 

That’s the essence of Ray Dalio’s Truth Machine and the foundation of his formula for the good life. In an upcoming post, I’ll discuss some methods to bring Dalio’s process into your own life and business.

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Thanks for reading. If you enjoyed this post, you may also enjoy these other articles related to Principles:

Ray Dalio’s Principles – 4 Steps For Better Decisions

  1. This is hard. Billions of dollars a year are spent on out-performing the markets and few have been able to do it consistently for as long as Dalio and his team at Bridgewater.
  2.  It’s worth noting that being the largest hedge-fund does not necessarily happen because you beat the markets. It’s an accomplishment in and of itself. Becoming the world’s biggest requires strong returns but it also requires a world-class organization to support it.
  3. Einstein’s Mistakes – https://www.amazon.com/Einsteins-Mistakes-Human-Failings-Genius/dp/0393337685
  4.  Unknown Mathematician Proves Elusive Property of Prime Numbers – https://www.wired.com/2013/05/twin-primes/
  5.  Dalio writes that this is due to fundamental properties of how our brains work. Specifically, that the amygdala plays a large role in creating the feelings that give our ideas an emotional character.
  6. It’s interesting to note that this assumes you can accurately estimate the time it will take to get the things you value and that either your preferences will be stable through time or that you can accurately estimate the preferences of your future self.
  7. Is Gravity An Illusion? – https://youtu.be/NblR01hHK6U


Passion is Bullshit – Cal Newport on Finding Work You Love

Once upon a time, my job was to sell bonds. I didn’t like my job. I spent a lot of time thinking about what job I should do instead. The internet said that people should do what they are passionate about. So I thought, what am I passionate about? And I thought about it some more. But the answers were never that compelling.

There were a lot of things I was interested in, but nothing had that quality of deep and soul consuming fire which sends people up the tallest mountains or dodging bullets to feed refugees. So I kept thinking about it. And then, finally, I read Cal Newport’s book, So Good They Can’t Ignore You.

Now I can tell you that passion is (mostly) bullshit. There is a better way to find work you love.

Why Passion Is Overvalued And Overblown

The myth that passion is the way to find work we love, like any good lie, is built on a grain of truth. That truth is that when someone is innately passionate about something, and it works out it for them, it just makes so much sense. We see someone who was born passionate become successful at what they love, and think by golly that’s the way the world is supposed to work. But we forget that this is like looking at someone who was born with a passion for playing the lottery and happened to hit the jackpot – it doesn’t mean it’s going to work for everyone.

The second reason we over attribute success to innate passion is that we tend to like what we become good at. There are a whole lot of people who did not decide what to work on based on any preexisting passion, but developed passion because they became good at what they did. These people then confuse things by telling themselves and others that they have been passionate about what they do all along.

Cal Newport opens So Good They Can’t Ignore You with Steve Jobs as an example of someone who was not always the quintessential passionate entrepreneur. In truth, Jobs was a bright young man who stumbled into something good and then developed a passion for it only after experiencing some success. As evidence, Newport cites the fact that Jobs was a co-founder at a startup company before starting Apple but abandoned his job without telling his co-founders to spend months at the All One spiritual commune. Not the type of behavior you’d expect from a person who was supposedly deeply passionate about starting a computer company.

Finally, some people just lie about being passionate. They say they love what they do because they’re afraid to admit they don’t. This is a symptom of the fact that our society presumes that to be good at something you must be innately passionate about it. So much so that many people feel it is a mark of personal failure to even admit they do not LOVE their jobs.

For all these reasons and more, passion gets way more credit than it’s due.

Ask Not About Passion But About Career Capital

Instead of trying to figure out what we are passionate about, Newport urges us to focus on acquiring what he calls career capital. For Newport, career capital is rare and valuable skills.

How is this different than the passion-based approach?

First, as a question, the career capital framework shifts the focus of our decision criteria from a question that is centered around “I”, “What am I passionate about?”, to a question that is centered around others, “What is the world looking for that I can become really good at?”

Second, it specifies that the skill must be rare and valuable. For instance, writing words on the internet about books you’ve read is not a rare and valuable skill, so getting good at that is probably a waste of time.

Third, the career capital framework does not demand passion as a prerequisite for trying things. This means you won’t prematurely disqualify things you may end up having a great career in before you have a chance to try them.

Fourth, using the career capital framework makes it explicit that you have to not only identify what skill you want but also acknowledge that you have to get really good at it. Getting good at things is hard. To become genuinely skilled at something you have to get up and do stuff that is tiring and dull and uncomfortable and you have to keep doing it, often for years. Acknowledging this up front helps you make decisions about what you are willing to pursue.*

Finally, the Career Capital approach also provides a safer road-map for getting to where you want to be because as Newport points out, passion can be dangerous. Dangerous because making decisions on passion alone can lead us to attempt things that we are genuinely unprepared for. Passion has lead many people to start businesses armed only with good intentions and no skill or contacts. Unfortunately, this is like jumping out of an airplane without really knowing how to use your parachute. Yes, you are deeply motivated to learn how to open your chute but you only have so much time to do it and the results will be devastating if you don’t. I did this when I started a business without customers. It’s painful, don’t do it.

Career capital is not as sexy as passion. No one is going to put “Develop Career Capital” on a t-shirt or mug. In fact, it’s so economically intuitive as to be banal. But it is a better approach because it both changes the questions we ask and better defines what we’re seeking.

Once You Have Career Capital, Bargain for Control

The final but critical step in Newport’s formula for achieving work you love is to bargain with your accumulated career capital for control and autonomy over what you do.

To see why these qualities are critical to having a career you love, imagine what it would be like to be a rock star without them. Yes, you’d be famous, and make a lot of money but if you only had three weeks of vacation per year, and no say over where and what you had to play, you’d probably grow to hate it in the long run.

Now imagine you’re a rock star that gets to decide where and how often you work (within reason), and you’re also allowed to pick most of the songs you play. You’d probably end up hating the former and loving the latter scenario, even though they are technically the same job.

Part of the brilliance of Newport’s framework is that he makes it explicit that our ability to set the terms of how we work can be just as, if not more important than what we do.

Work Past And Future

In 1931 the economist John Maynard Keynes wrote that given the rate of improvement in economic productivity, in the future (our present), we would only have to devote a few hours a day to paid “work.” The real problem, he predicted, would be figuring out what to do with all our leisure time.

Keynes’ vision of the future has not come to pass. We still spend a large portion of our lives doing whatever people are willing to pay us for. There has however been a somewhat compensatory shift in focus towards making that work meaningful and enjoyable.

The problem, up to now, had been that no one gave much serious thought to how to intelligently go about finding work you love. Cal Newport’s career capital framework has changed that. Both by reframing the questions we ask and by better defining what it is we’re looking for, Newport gives us the tools to make better decisions and ultimately create more meaningful lives.

 



I Is Not Enough – Amartya Sen on the Utility and Moral Dimension of Thinking Beyond Ourselves

One of the reasons for this blog is to share different frameworks of thought that I’ve found helpful or interesting with others. I am the kind of person who really enjoys having a conceptual framework for why, what and how I go about doing just about anything.

In the introduction to his book, The Idea of Justice, the economist Amartya Sen makes an eloquent case for his attempt at crafting a theory of justice. What I love about the passage that follows is that you could replace the word justice for any number of things such as: nutrition, monetary policy, relationships, investing, meaningful work, and have a compelling argument for why we should strive to build a theory around our actions and the actions of others:

The identification of redressable injustice is not only what animates us to think about justice and injustice, it is also central, I argue in this book, to the theory of justice. In the investigation presented here, diagnosis of injustice will figure often enough as the starting point for critical discussion. But, it may be asked, if this is a reasonable starting point, why can’t it also be a good ending point? What is the need to go beyond our sense of the word justice and injustice. Why must we have a theory of justice?

To understand the world is never a matter of simply recording our immediate perceptions. Understanding inescapably involves reasoning. We have to ‘read’ what we feel and seem to see, and ask what those perceptions indicate and how we may take them into account without being overwhelmed by them. One issue relates to the reliability of our feelings and impressions. A sense of injustice could serve as a signal that moves us, but a signal does demand critical examination, and there has to be some scrutiny of the soundness of a conclusion based mainly on signals. Adam Smith’s conviction of the importance of moral sentiments did not stop him from a seeking a ‘theory of moral sentiments’. Nor from insisting that a sense of wrongdoing be critically examined through reasoned scrutiny to see whether it can be the basis of a sustainable condemnation. A similar requirement of scrutiny applies to an inclination to praise someone or something.*

As compelling as this is for me, there are, I’ve been told, some people who consider an intellectual framework to be superfluous, if not downright stupid. To such people, a theory is nothing more than an extra layer of unnecessary complexity around a problem. Instead of theoretical frameworks for action, such people assign value only to their intuition and unique personal experiences.

For example, people often dismiss the need for an intellectual framework in the context of weight-loss and exercise. They say things like, “If I want to lose weight,  I just eat less and exercise more.” or “If I want to get stronger, I just go to the gym and lift heavy weights.” And in some sense these people are right, they recognize that often it is doing simple and effective things that make real progress and over intellectualizing can be a waste of time and energy.

The problem with this type of thinking is that it runs a dangerous risk of oversimplification and ignores the role that generalizable framework plays in improving the lives of others.

I say improve the lives of others because meaningful lives are the result of good decisions (on average) and good decisions are the result of understanding how the world works. In light of that understanding, the failure to try and think beyond our own intuition and experience can be viewed a failure from a moral dimension.

The failure to attempt to think beyond ourselves is a moral failure because it means we never stop to ask if and how our experiences manifest the underlying reality of the world. Such an approach to life precludes the possibility of creating a generalized framework that can be communicated, tested and then shared to better the lives of others. 

That said, there are good reasons to be skeptical of theory. Sometimes theories are bullshit.1 But the failure of an individual framework is not the failure of the method. We should consider what works for I and then carefully, and incrementally attempt to discover why and how it will work for we.

 

*Sen, Amartya Kumar. The Idea of Justice. Cambridge, MA: Belknap of Harvard U, 2011. Print.




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