As Ray Dalio, 68, looks at today’s systematically driven markets to develop rules for algorithm building, perhaps the most important point of his success is found in recognizing where algorithms don’t work. This is one unique aspect of how the founder of Bridgewater Associates, the world’s largest hedge fund thinks, attempts to look at all angles of issues without bias or emotion. This topic, which Dalio categorizes under “radical transparency,” is one with relevance not just in investing, but also applies in a world where self-confirming echo chambers on all sides of political arguments are increasingly at the heart of a societal divide. In a ValueWalk interview, Dalio waded through his firm’s investment philosophy to address how decision-making algorithms are built, but at the same time put on display thought processes under which such math-based systems might fail – and then become dangerous.
Radical transparency can punch people in the face, knocking out those without a strong personality
Dalio has a core attitude that can be seen from the days of his working as a brash young commodities hedger who punched his boss in the face and lost his first job. The punch tells a unique story about Dalio but also serves as a commentary on algorithmic thinking, which Dalio both praises and frets about.
On a certain level, the punch, while a crude expression of opinion, isn’t much different than the concept of radical transparency. Listening to professional challenges centered on an individual's intellectual heft and cutting their ideas apart in raw format for everyone to see is the modern-day version of a “punch.” This environment can only be tolerated by the strongest personal constitutions, which speaks to nearly 1/4 of all new Bridgewater recruits leaving shortly after experiencing the pain.
But then there is the larger societal thinking regarding algorithms which also can deliver a punch. Algorithms don’t discern facts based on political niceties. They look for core truths and sometimes hit people in the face with conclusions that might differ from their own bias. Seeking out information that runs counter to an investment thesis that runs counter to one’s own beliefs and challenging other people in a polite and respectful environment can be among the most difficult skills an individual can acquire, and here this unconventional approach can cross lines of social norms if the implementation is not precise.
There is a danger
“There is a danger,” Dalio told ValueWalk in an October 2 interview. He was looking into the algorithmic future and not only considering the potential for investment loss, but societal risk. “If you don’t have a deep understanding of the algorithm behind machine learning and data mining – and the future is different from the past -- you will blow up.”
When understanding algorithms, Dalio
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