Ray Dalio: Mastering Decision-Making: Systematize and Back-Test for Better Outcomes

In this interview with Columbia University, Ray Dalio recommends taking a thoughtful and systematic approach to decision-making. He emphasizes the importance of identifying and writing down the criteria used to make decisions, suggesting that this allows for a methodical evaluation and improvement of decision-making processes. He explains that by systematizing these criteria, it is possible to back-test decisions to understand their effectiveness and see the underlying mechanics, akin to a machine. Here’s an excerpt from the interview:

I recommend this to you. I recommend when you think about your decisions everybody goes and they make decisions quickly, and they don’t think enough about the criteria that they use to make decisions.

And if you pause and you reflect on your criteria when you’re.. what are they? Write them down.

I found that I could systemize them and I could back-test them and I could see oh if I made these decisions this way I know how it would have worked.

And I could see how the machine works. Because everything works like a machine. And so by doing that we built game plans together.

We stress tested each other and we built these systems. So it’s an expert system we’ve built. Expert systems, artificial intelligence began in 1953 and it’s taken very forms, and it has various forms. Neural Nets and expert systems and so on.

We built these expert systems that looks at that.

Now I have a game plan that I execute. So it’s like we were talking about. The 1930s and how that is well if you understand how the machine works then you can build those.

And then take diversified bets, so those were the things. And so risk control was most important and think of it this way.

If you lose half you have to… if you lose 50% of your money you have to make 100% to get back.

So what you have to start with, what is the amount you can lose?

And I said to myself I never want to lose a third and in my… so in the 33-year history of managing money up until covid.

The worst year we had was 7.9%. We made money in 30. I think it was 30 of the 33 years averaged about 11 or 12% and never had a loss that was greater than 7.9%.

Covid we had a 12% loss and our returns were uncorrelated with other asset classes or other managers and so we were a great asset for institutional investors. We made more money than any other hedge fund in existence and we came bigger because that was our formula.

You can watch the entire interview here: