Unravel the decision-making prowess of Ray Dalio, a titan in the world of finance. Discover the principles that guide his choices, and learn how to apply these strategies to your own life and career.
Most interesting to me about Ray Dalio is his decision-making process
People who have a sound decision making process have better outcomes in life
- Being a contrarian means being uncomfortable sometimes. Some people are good at being uncomfortable, and some are not
- To achieve superior investment results, your insight into value has to be superior
“When you have a view that’s different from the consensus, you’re gonna be wrong a certain number of times”
Find people of alternative points of view and have quality conversations back and forth
- Decision-making should be two steps: take in information, understand disagreement, and then make a decision
- Explore disagreement to prevent yourself from being wrong
What typically gets in the way of the process like Dalio wants to create? Ego and organizational politics
The ego of the decision maker is so often the source of a problem or mistake.
- Instead of just trying to be smart, it is wise to focus on not being stupid. Instead of going after the person who has the most different point of view, who is the most thoughtful, and then have a conversation to see their view of the world, that creates a discovery process that reduces the probability of being wrong.
As context, what Dalio is setting out to do as an investor is extraordinarily hard
To say that a tiny number of people outperform the markets by making macro bets is a radical understatement. A handful of people have been able to do this successfully over many years at scale.
- Dalio has discovered a source of alpha (outperforming a benchmark) through a process that results in better decisions
- He starts with a rational analysis of the information he has and from that he forms a hypothesis
- Then exposes that hypothesis to thoughtful people with alternative points of view and methods of analysis who may disagree with him and then he wants a radically transparent “back and forth” discussion
Organizational politics
One advantage that Buffett and Munger have is that in many cases the “radically transparent” discussion is just between the two of them
- Being different is a source of competitive advantage
- If you want different results you must act in a different way
- Never say anything about a person you wouldn’t say to him directly
- Criticism is both welcomed and encouraged at Bridgewater, so there is no good reason to talk behind people’s backs
Other approaches to decision-making
Munger uses a two-track analysis: what are the factors that really govern the interests involved, rationally considered?
- Look for psychological bias that may have interfered with making a rational decision
- Expose your ideas to the best minds they can find
- Buffett calls Munger the “Abominable No Man”
- Having a diverse “posse” of experienced people that you trust look at a potential investment is wise if you want to avoid making too many mistakes
- People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying
Recognize the Power of Knowing How to Deal with Not Knowing
The cost of a bad decision is equal to or greater than the reward of a good decision, so knowing what you don’t know is at least as valuable as knowing
- Recognize opportunities where there isn’t much to lose and a lot to gain, even if the probability of the gain happening is low
- Make all decisions logically, as Expected Value Calculations
- Consider both the probabilities and the payoffs of the consequences
