An Open Letter to Ray Dalio

I liked Ray Dalio’s book, Principles, so much I bought three more copies and left them around the office. Here I want to make a suggestion that I hope Mr Dalio will read.

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Don’t let the names Bill Gates and Tony Robbins put you off! This book shows a methodology for using data and balanced analysis and trying to be reality-based. He describes a five-step approach to life and achieving what you want:

  1. Have clear goals
  2. Identify and don’t tolerate the problems that stand in the way of achieving those goals
  3. Accurately diagnose the problems to get at their root causes
  4. Design plans that will get you around them
  5. Do what’s necessary to push these designs through to results

I read the first draft of this work when he put his Principles PDF online several years ago. I was surprised that his understanding of the world was so mechanical and predictable. Later, when I saw his video, How the Economic Machine Works, I was astonished that Dalio thought the world was so predictable and machine-like. No mention of complex adaptive systems. No mention of randomness, luck, or variance. This is surprising from a guy whose investment decisions are mostly made by AI algorithms that know quite a bit about variance. Reading the book, I am baffled by statements like “accurately diagnose the problems to get at their root causes.” It sounds great, but a large percentage of the time you are simply wrong, because the signals are very difficult to detect. Remarkably, the words “luck” and “variance” aren’t really mentioned. The term “randomized controlled experiment” occurs not even once.

Understanding the Root of the Problem
The world is a complex place with many interconnected systems all interacting. Step 3 — accurately diagnose problems to get at their root causes — can be particularly difficult. Yet, as any gambler knows, you can make a bad decision and have a good outcome. This is exactly what happened to Dalio’s Bridgewater fund in 2008: they misdiagnosed the coming recession and took actions that worked out well but for the wrong reasons. Here he is on the Great Recession:

In 2007, this [depression] gauge indicated that a bubble of debt was nearing its bursting point because the costs of debt service were outpacing pojected cash flows. Because interest rates were so close to 0 percent, I knew that central banks could not ease monetary policy enough to reverse the downturn the way they had in prior recessions.

He goes on, but these two sentences are telling. This is the common narrative that most people believe, and which he details in his latest book. Yet on further detailed analysis of the facts, two researchers have shown the common narrative to be false. I explain this at the beginning of my essay:

(If Mr Dalio is reading this, I hope he will click on that link and spend some time there.)

The “true causes” of things can be extremely difficult to see, even years after the event. I expect that if Dalio were to spend some time with the book Shut Out, by Kevin Erdmann, he would see that half the cause of the recession was actually too little housing and not a credit bubble. If he then watched videos of Scott Sumner explaining that the cause of the recession was actually the Fed reading the signals incorrectly, he might revise his analysis.

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In that case, he would have to admit that he called the market correctly but for the wrong reason, that his machine was wired incorrectly and just happened to get lucky in producing a great result. In my view, this made him overconfident as he continued to talk with central bankers about “true causes” that were actually “true misdiagnoses.” I think he may have simply gotten similarly lucky once or twice after that, leading to fantastic compound wealth and fame.

I wouldn’t take anything away from what Dalio has accomplished. He truly wants to help others succeed. He has the chance to make a huge difference through his philanthropy, and I hope he does. I just wish he would see things more from an organic-systems point of view, in which small or nearly-invisible things have huge effects later. A good reference here would be Fooled by Randomness by Nassim Taleb:

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Machines vs Ecosystems
Dalio sees patterns. He often talks about having seen something before, so he is ready for it this time. Those of us who study complex adaptive systems would say this is a naive approach to understanding the world.

Dalio has proven his own theories with his own money and is one of the richest men in the world. Who am I to say that he might be wrong more often than he realizes? We’ve both failed and learned from our failures. To be honest, I don’t really care how much money he has. I care about understanding the world and interpreting data to find the truth. While Dalio has a machine view of the world, I have a real-time adaptive view that looks through the lens of uncertainty, variance, and luck. Skill is involved, but less than successful people claim. Business is an ecosystem, and ecosystems are full of surprises.

Chapter 2 of the book is called “Use the 5-Step Process to Get What You Want Out of Life. “ I would add: (Your mileage may vary.)

It’s not easy to understand the world, but we are never too old to learn. If you don’t take randomness, luck, and uncertainty into account, you can’t possibly build a view that serves you well. I believe Dalio understands this but doesn’t write about it, possibly because then it looks less like he’s in control than he would like us to believe. Or maybe some other reason. He seems to be a very honest person, willing to admit his mistakes and learn from them.

Ray Dalio is all about radical open-mindedness. Perhaps he will want to use this occasion to look into the Great Recession and revise his view of the world economy, and even the “debt cycle” as he calls it (I don’t think there is a debt cycle). There may be other times where he didn’t quite understand cause and effect but still came out okay. I would be happy to go through his book with him and write a summary of what he may have gotten wrong. Having written five books, I can look back and realize only a fraction of my words turned out to be true or even useful, though they made me look like an expert. Most of it was well-written nonsense. As another example, I have a ton of respect for Hans Rosling, but I also think he got at least two big things wrong in his amazing book, Factfulness.

Ray Dalio was in the right place at the right time to do well with his approach. He was just enough ahead of everyone else to have an edge (I would also put Fortress and Two Sigma in the same category, and Nassim Taleb in a different category). Dalio is right to hedge his bets and not think he knows everything. But I can’t quite reconcile his overconfident tone telling us not to be so overconfident. Maybe I’m that way, too. Hmm.

If you go back to a 25-year-old Ray Dalio and run the world forward 1,000 times, I expect only a handful of times does he come out that far ahead. Most of the time, he does well but not spectacularly well. I think, as Warren Buffett and Bill Gates both admit (but Tony Robbins doesn’t), that luck had a lot to do with the outcome.

I highly recommend this book. I think anyone who reads and really understands Principles, Fooled by Randomness, The Black Swan, Thinking Fast and Slow, Randomistas, Skin in the Game, and Factfulness will have an unbeatable view of the world. And still — your mileage will vary.

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David Siegel is a serial entrepreneur, author, educator, and voice for reason. Please learn about his new institute, follow him on Twitter and subscribe to his new newsletter at Cutting Through the Noise.

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Provocateur, professional heretic, slayer of myths, speaker of truthiness to powerfulness, and defender of the Oxford comma.

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