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Stepan Lavrouk
Stepan Lavrouk
Articles (132) 

Ray Dalio: Encourage Thoughtful Disagreement

The founder of Bridgewater encourages his employees to be brutally honest

April 22, 2019

In addition to being the founder and chairman of Bridgewater Associates, Ray Dalio (Trades, Portfolio) is well known for his introspection and humility. But it was not always this way. In a recent talk with students of Stanford Graduate School of Business, which was published last week, Dalio discussed some of his early failures and how hubris almost caused him to go completely broke. He also explained how he developed his system of thought, using his failures to refine his investing approach.

Use failure to come up with your own principles

“I would view every failure as a puzzle that would give me a gem if I could solve the puzzle. And the puzzle was: 'What would I do differently in the future so that I wouldn’t have that bad outcome?' And if I could solve that, that would give me the gem, and the gem was a principle...The best comes from learning from mistakes and doing that in a systematic way.”

Reflecting on failure is not a natural thing to do. Usually, we want to forget anything that might be painful or humiliating. But for Dalio, doing so means denying yourself an opportunity to refine your decision-making process. From his point of view, making mistakes is the best way of learning something because the negative experience of being wrong and suffering provides a powerful incentive for not repeating it.

Encourage thoughtful disagreement

Simply learning from mistakes is not enough, though. Dalio said that in order to refine their approach, investors must seek out people who disagree with them.

“I think we have ego and blind spot barriers that stand in our way, so that notion of being attached to what you know is such a big thing. There’s a subliminal reaction when someone disagrees with you - rather than producing curiosity, it produces antagonism. And I think a lot of that has to do with the education system - you’re rewarded for knowing, or you’re rewarded for not making mistakes, rather than knowing what your weaknesses are… Intellectually, we want to know our weaknesses. Emotionally, that can be difficult.”

The conscious, the thinking part of our brain, wants to do the right thing and to be critiqued and criticized. Rationally speaking, we should want to know where our weaknesses are. However, as we know all too well, this is easier said than done. The subconscious, the emotional part of our brain, does not like disagreement. No one likes being told they are wrong, regardless of whether or not the criticism is coming from a well-meaning place.

We cannot fully overcome our cognitive blind spots, but what we can do is be aware of what they are and how the can inhibit our thinking. By keeping a record of our investment decisions and the types of arguments that we use to arrive at them, we can uncover our weaknesses. For instance, some investors get too easily spooked when they see their holdings selling off. Others may be too impulsive and risk-prone. By keeping close track of your decisions, you can uncover trends and patterns. Once you understand your process, it becomes much easier to change it.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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