One of the most painful experiences of Bridgewater Associates founder Ray Dalio’s life was also one of the greatest.
Delivering a TED talk earlier this year, Dalio recounted how mistaken views about the debt crisis in the early 1980s cost him dearly.
“I mean, while the debt crisis happened, the stock market and the economy went up rather than going down, and I lost so much money for myself and for my clients that I had to shut down my operation pretty much, I had to let almost everybody go,” he recalls.
“And these were like extended family, I was heartbroken. And I had lost so much money that I had to borrow 4000 dollars from my dad to help to pay my family bills.”
However, a subsequent reassessment of his attitude towards decision-making lent greater perspective and in turn saw his business grow.
Making an idea meritocracy
“I gained a humility that I needed in order to balance my audacity,” Dalio observes.
“I wanted to find the smartest people who would disagree with me to try to understand their perspective or to have them stress-test my perspective. I wanted to make an idea meritocracy.
“In other words, not an autocracy in which I would lead and others would follow, and not a democracy in which everybody’s points of view were equally valued, but I wanted to have an idea meritocracy in which the best ideas would win out.”
To do so, Dalio explains “radical truthfulness and radical transparency” was required, with people needing to say what they really believed.
Dalio says this is how they have been operating for the last 25 years.
“We’ve been operating with this radical transparency and then collecting these principles, largely from making mistakes, and then embedding those principles into algorithms.
“And then those algorithms provide – we’re following the algorithms in parallel with our thinking. That has been how we’ve run the investment business, and it’s how we also deal with the people management.”
The Dot Collector
Employing a tool called the Dot Collector, employees are able to express their opinions, with all opinions on display, Dalio says.
The tool shows that each opinion is one of many and encourages people to question their opinion, with Dalio stating “it shifts the conversation from arguing over our opinions to figuring out objective criteria for determining which opinions are best”.
“It watches what all these people are thinking and it correlates that with how they think.”
“And it communicates advice back to each of them based on that. Then it draws the data from all the meetings to create a pointillist painting of what people are like and how they think. And it does that guided by algorithms. Knowing what people are like helps to match them better with their jobs.”
Dalio says they used collective decision-making over individual decision-making “because it elevates ourselves above our own opinions so that we start to see things through everybody’s eyes, and we see things collectively”.
“It’s been the secret sauce behind our success”
“It’s why we’ve made more money for our clients than any other hedge fund in existence and made money 23 out of the last 26 years.”
While Dalio acknowledges that it may not be an approach suited to everybody, he stressed its success.
“It takes about 18 months typically to find that most people prefer operating this way, with this radical transparency, than to be operating in a more opaque environment.
“There’s not politics, there’s not the brutality of – you know, all of that hidden, behind-the-scenes – there’s an idea meritocracy where people can speak up. And that’s been great. It’s given us more effective work, and it’s given us more effective relationships.”