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:
- He and his team at Bridgewater have delivered market-beating returns for the past 30 years.1
- 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.
Thanks for reading. If you enjoyed this post, you may also enjoy these other articles related to Principles:
- 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. ↩
- 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. ↩
- Einstein’s Mistakes – https:/
/↩ www.amazon.com/ Einsteins-Mistakes-Human-Failings-Genius/ dp/ 0393337685
- Unknown Mathematician Proves Elusive Property of Prime Numbers – https:/
/↩ www.wired.com/ 2013/ 05/ twin-primes/
- 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. ↩
- 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. ↩
- Is Gravity An Illusion? – https://youtu.be/NblR01hHK6U ↩