Bayesian Investor Blog

Book review: Principles: Life and Work, by Ray Dalio.

Most popular books get that way by having an engaging style. Yet this book’s style is mundane, almost forgetable.

Some books become bestsellers by being controversial. Others become bestsellers by manipulating reader’s emotions, e.g. by being fun to read, or by getting the reader to overestimate how profound the book is. Principles definitely doesn’t fit those patterns.

Some books become bestsellers because the author became famous for reasons other than his writings (e.g. Stephen Hawking, Donald Trump, and Bill Gates). Principles fits this pattern somewhat well: if an obscure person had published it, nothing about it would have triggered a pattern of readers enthusiastically urging their friends to read it. I suspect the average book in this category is rather pathetic, but I also expect there’s a very large variance in the quality of books in this category.

Principles contains an unusual amount of wisdom. But it’s unclear whether that’s enough to make it a good book, because it’s unclear whether it will convince readers to follow the advice. Much of the advice sounds like ideas that most of us agree with already. The wisdom comes more in selecting the most underutilized ideas, without being particularly novel. The main benefit is likely to be that people who were already on the verge of adopting the book’s advice will get one more nudge from an authority, providing the social reassurance they need.

Advice

Some of why I trust the book’s advice is that it overlaps a good deal with other sources from which I’ve gotten value, e.g. CFAR.

Key ideas include:

• be honest with yourself
• be open-minded
• focus on identifying and fixing your most important weaknesses

I’ve often thought that parents and schools overemphasize the value of having the right answers all the time. It seems to me that the best students in school tend to be the worst at learning from their mistakes, because they have been conditioned to associate their mistakes with failure instead of opportunity. This is a major impediment to their progress. Intelligent people who embrace their mistakes and weaknesses substantially outperform their peers who have the same abilities but bigger ego barriers.

Just as long-distance runners push through the pain to experience the pleasure of “runner’s high,” I have largely gotten past the pain of my mistake making and instead enjoy the pleasure that comes with learning from it. I believe that with practice you can change your habits and experience the same “mistake learner’s high.”

Over time I learned that getting more out of life wasn’t just a matter of working harder at it. It was much more a matter of working effectively, because working effectively could increase my capacity by hundreds of times.

Radical transparency is an important part of the advice. But he doesn’t mean total transparency, and I’m not too clear on how he decides specific cases. E.g. he avoids being transparent about compensation, saying the value of sharing is low, and the distraction would be significant. But I’d guess there’s moderately high value to many employees in knowing what others make. I’ll guess that he’s biased here because he’d end up paying higher salaries if they were transparent.

And with virtually any decision about whether to be transparent about something, there will be people claiming that transparency is low value, high distraction in this case. What keeps radical transparency valuable in the face of those excuses? I presume that in order for Dalio’s approach to work, people need to focus on having the right mindset, rather than just imitating his actions. And since mindset is harder to observe, radical transparency is harder than it appears.

The book doesn’t quite warn enough about the risks of attempting to implement the advice. E.g. if some employees adopt radical honesty, but others pretend to do so, while remaining politically manipulative, you’ll likely get irreparably increased discord.

Unique Tools

Dalio mentions some unusual tools that sound useful for organizations.

Believability-weighted voting sounds quite powerful, if implemented well. But evaluating the believability of each person requires, at very least, a fair amount of overhead to such a system started.

Dalio makes heavy use of personality tests, mainly to figure out what roles each person belongs in.

One interesting fact that he notes is that shapers of philanthropy (such as Muhammad Yunus and Bill Gates) scored low on “concern for others”, which Dalio interprets as meaning they prioritize achieving goals over pleasing people. This hints that Effective Altruism is right to emphasize effectiveness over altruism.

Straw Vulcan?

Dalio often writes about the lower, emotional parts of the brain as if they’re obstacles to be overcome, as if he was endorsing parts of the stereotypical straw Vulcan approach to rationality. E.g.:

• “Realize that the conscious mind is in a battle with the subconscious mind.”
• “Recognize that 1) the biggest threat to good decision making is harmful emotions …”
• “That damned amygdala …”

Yet a careful reader will notice a few brief hints that Dalio realizes the subconscious mind provides value. E.g. when describing hiring decisions, he admits it’s sensible to use intuition. Or: “If I can reconcile my emotions with my logic and only act when they are aligned, I make better decisions.” (He later endorses the idea of “no pain, no gain”, which sort of looks like it contradicts that prior quote. But pain isn’t an emotion – I assume he wants us to accept pain, but not the suffering that’s often associated with it).

It seems misleading to describe emotions as harmful. Instead, I want to reframe that situation as emtions being used in service of harmful goals. E.g. I sometimes find my emotions guiding me toward investments that will make good conversation topics, even though I believe that that goal conflicts with the goal of making money.

Maybe some of Dalio’s attitudes are due to investing being one of the few areas where emotions aren’t helpful?

Dalio’s attitude toward emotions will likely be harmless for most readers, but may deter a few from finding useful ways of handling emotions.

Investment Ideas

The book says rather little about financial markets.

I attribute as much of my success to what I’ve learned about the brain as I do to my understanding of economics and investing.

The one valuable investing idea that he mentions is his Holy Grail chart, which illustrates the value of diversification. But he doesn’t indicate how hard it is to find large numbers of uncorrelated revenue streams. His success at that is an unusual boast, disguised as a mundane result. I’ve been trying to find such revenue streams for quite a while, and don’t know how to come close to the number that Dalio claims to have found.

I was unimpressed by his understanding of macroeconomics. At one point he says: “Inflation, which the ECB was mandated to get to about 2 percent, was below that target and falling.” Yet he goes on to explain why his solution to the EU’s economic problems (quantitative easing) wouldn’t be inflationary. That’s confusing, because quantitative easing is clearly designed to increase inflation, and getting inflation up to around 2 percent was a key part of what Europe needed. Maybe Dalio meant that it wasn’t excessively inflationary, but it’s hard to infer that from what he wrote. Or maybe he’s trying to appeal to people who are scared of explicitly promoting inflation, but who want the effects of inflation?

Conclusion

Dalio tries to cover too many ideas, which means he often doesn’t cover many of them well.

People who follow the book’s advice seem likely to be more successful than those who don’t, but reading the book seems unlikely to change many people’s habits – it will mostly provide reassurance to those who are already close to implementing the advice.