Ray Dalio is not just known for founding Bridgewater Associates – the world’s largest hedge fund today. Many of us at Marcellus have also been inspired by his book ‘Principles’, especially his approach to building ‘radical transparency’ in the workplace. However, this week saw the launch of a highly critical book by Rob Copeland, a New York Times journalist, about how Dalio’s attempts to build a systematic way of implementing ‘Principles’ at Bridgewater not just failed but also did more harm than good. This piece is an adaptation of the book focusing on the episode of implementing principles including two very high profile hires.
“Since founding Bridgewater nearly 50 years ago, Dalio has become one of the world’s richest investors (Forbes pegs his net worth at roughly $20 billion). He is widely credited with having predicted and profited from the 2008 financial crisis, which made him famous. Yet the Greenwich, Connecticut, resident professes to be seeking something more important than the mere accumulation of wealth. His main interest, as he wrote in his best-selling autobiography-cum–self-help book, Principles: Life and Work, is to lead others toward “meaningful lives” and “meaningful relationships.””
One of his methods to implementing ‘Principles’ included videotaping meetings of employees and archiving them for learning on behaviour by everyone else.
“Dalio ruled Bridgewater under what he called his “Principles,” which held that no matter was too small for investigation. There were hundreds of Principles, including one that stated, “People have to value getting at truth so badly that they are willing to humiliate themselves to get it.” Employees were instructed to “probe” one another’s work, as Dalio put it, on a daily basis. That wasn’t all. As part of what Dalio called “radical transparency,” a team of videographers and editors made tapes and videos of Dalio’s many lessons to his staff. These were uploaded into what Bridgewater called its “Transparency Library,” viewable internally. All employees at Bridgewater — from top investment strategists to receptionists — were required to view cases pulled from this library.
… Staffers were given iPads and directed to rank one another on a one-to-ten scale on their performance dozens of times per day in categories derived from Dalio’s Principles, such as “ability to self-assess” and “pushing through to results.”
.. The goal of all the data, Dalio would say, was to sort everyone at Bridgewater on a single scale. At Bridgewater, the most important assessment was “believability,” a score that was applied to each category. If one was judged highly believable in “pushing through to results,” for instance, then his or her ratings of other people in the same category would be counted more heavily. Dalio called this “believability weighting,” and in virtually all important categories, Dalio expected that his rating would be the highest, or close to it, at the firm. That status essentially gave him the final word, no matter how many others at Bridgewater might have disagreed with him.”
Dalio even hired a celebrated computer scientist from IBM, David Ferrucci to add Artificial Intelligence (AI) to the ‘Principles’ and the rating tools.
“Ferrucci decided to seed the software system with Dalio’s own definitions of the terms. Ferrucci’s team pulled hundreds of hours of videos from the Transparency Library, Bridgewater’s repository of meeting recordings, and tried to track patterns in when Dalio cited specific Principles. Ferrucci’s lab employees also went through years of Bridgewater’s old management-training videos — the same ones that all staffers were tested on, including the piss case — and painstakingly noted which Principles were used and in what context.
From all this effort, the researchers created a series of word clouds, intending to show whether employees who used certain language tended to rate highly in one attribute or another. More broadly, Ferrucci hoped to train a computer to read or listen to a passage of text and realize that, if certain words were used in a certain order, the topic at hand dealt with one Principle or another. If the scientists could nail the method, they could essentially create a computerized version of Dalio himself.
The goal proved elusive. Ferrucci’s team could find no pattern to predict when the Bridgewater founder — or anyone else at Bridgewater — would bring up one Principle or another. The employee ratings also showed little underlying logic. Ferrucci shared with colleagues a gradual awakening: Dalio’s system might not be a system at all.”
Dalio then hired Jon Rubenstein, known as the Podfather for having created the first iPod at Apple, in his bid to systematise decision making.
“A few months into his gig, Rubinstein was beginning to wonder aloud if there was a Principles system at all. The hedge fund was spending tens of millions of dollars on developing the Principles ratings software, but when Rubinstein tried to investigate what it actually did, he was simply told that it measured “believability.” Many told him the systems involved secret calculations from the former IBM scientist Ferrucci and that the researcher told almost no one how it worked.”
Rubenstein didn’t last long either with the firm eventually laying off all remaining staff which was building the ‘Principles’ software.
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
