Reading: Ray Dalio, “Principles”

Ray Dalio founded Bridgewater Associates in 1975 in a two-bedroom apartment in New York and built it, across the next forty years, into the largest hedge fund in the world by assets under management — at the time of Principles‘s 2017 publication, just over one hundred and fifty billion dollars. The book is an unusually plain statement of how he and Bridgewater operate, written by a man whose actual decisions over four decades have produced enough returns that the principles describing them are worth taking seriously regardless of one’s view of hedge funds. The book is also, by accident or by design, the clearest contemporary statement available of the discipline a Lean practitioner would recognise as jidoka: that the right response to a problem is to surface it, not to hide it.

The passage the practice has carried back to client conversations more often than any other in the book is the one in which Dalio tells the story of an early operational mistake at Bridgewater and the discipline he built out of it:

> One of our most memorable mistakes happened in the early 1990s, when Ross, who was in charge of trading at the time, forgot to put in a trade for a client and the money just sat there in cash. By the time the mistake was discovered, the damage was several hundred thousand dollars. > > It was a terrible and costly error, and I could have done something dramatic like fire Ross to set a tone that mistakes would not be tolerated. But since mistakes happen all the time, that would have only encouraged other people to hide theirs, which would have led to even bigger and more costly errors. > > Having a process that ensures problems are brought to the surface, and their root causes diagnosed, assures that continual improvements occur. > > For that reason I insisted that an issue log be adopted throughout Bridgewater. My rule was simple: if something went badly, you had to put it in the log, characterise its severity, and make clear who was responsible for it. If a mistake happened and you logged it, it was okay. If you didn’t log it, you would be in deep trouble. The error log (which we now call the issue log) was our first management tool.

Two things in this passage are worth dwelling on. The first is the explicit, named choice not to fire the trader. The second is that the first management tool at the largest hedge fund in the world was a log of things that went wrong.

The Toyota Production System has a name for the moment Dalio is describing: the andon cord, the rope or button at every workstation that any operator can pull to stop the line when they detect a problem. The discipline is the same in both places. The line stops not because the problem is large but because stopping is how the problem becomes visible to the people who can fix it. Dalio’s issue log is the andon cord of an investment firm — pulled in writing rather than by hand, but performing the same operational work.

What distinguishes Dalio’s account, and what makes the book worth recommending past the financial-services audience it was written for, is that he is unusually clear-eyed about why the discipline is hard. People hide mistakes because they are punished for them; the andon cord goes unpulled because pulling it draws attention; the issue log goes unwritten because writing in it is a public record of one’s own fallibility. The discipline survives only where the operating culture treats the surfacing as the work — not as an interruption to the work. Bridgewater’s record on this is mixed; the practice’s experience is that most clients’ records on this are worse.

The book is long, occasionally repetitive, and contains a number of principles the practice does not endorse and has no view on. It also contains, in the chapter on Principles of Work, a more sustained and operationally useful argument for radical transparency than any other contemporary management text has managed. A Lean practice that learns nothing from a hedge fund can probably learn something from this one, on the specific question of how a firm that genuinely wants its mistakes surfaced should organise itself to make the surfacing possible.

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