In 1975, Ray Dalio—a bullish 26-year-old trader—started a small advisory firm called Bridgewater Associates, out of his two-bedroom Manhattan apartment.
At first Dalio had zero clientele, and worked with a small team consisting of his close friend and an assistant. But shortly afterwards, the business took off rapidly.
By the late 1970s, Dalio’s publication called the ‘Daily Observations,’ became the go-to market research report for major organizations, including Nabisco and McDonald’s, and by August 1982, Dalio was hailed as a market wizard for predicting Mexico’s default. 1
As his fame and reputation grew, Dalio found himself increasingly surrounded by yes-men, with no one to challenge his radical ideas. And so, in November 1982, Dalio appeared on “Wall Street Week with Louis Rukeyser”—the most reputable financial news program at the time—and publicly declared that the United States was heading for a depression.
He was dead wrong. The United States economy rebounded and enjoyed a much higher rate of growth than ever before.
Meanwhile, Bridgewater Associates nearly went bankrupt, and Dalio was forced to lay off all of his employees, including his close friends. 2
Distraught and defeated, Dalio began to reflect on the mistakes and bad decisions that led to his mighty downfall. It was during these moments of introspection, that he asked himself a powerful question that would radically transform his life: “How do I know I’m right?”
Inspired by his eureka moment, Dalio resolved to rebuild Bridgewater on the foundation of a culture that seeks to answer this question.
Today, Bridgewater Associates is regarded as the most successful hedge fund in the world—managing over $160 billion in assets. And Dalio has amassed a net worth of about $17 billion, which ranks him as one of the world’s top 100 wealthiest people.
Even though he is often praised for his financial acumen, Dalio credits Bridgewater’s long-term success to one simple idea that emerged whilst solving the puzzle of the thought-provoking question he reflected upon in his earlier years.
The idea is called “Radical Transparency.”
Accelerated Learning, Innovation and Radical Transparency
“Holding wrong opinions in one’s head and making bad decisions based on them instead of having thoughtful disagreements is one of the greatest tragedies of mankind.”
― Ray Dalio
One morning, Dalio received a scathing email from his employee, Jim Haskell. It read:
“Ray – you deserve a “D-” for your performance today in the meeting … you did not prepare at all because there is no way you could have and been that disorganized. In the future, I/we would ask you to take some time and prepare and maybe even I should come up and start talking to you to get you warmed up or something but we can’t let this happen again. If you in any way think my view is wrong, please ask the others or we can talk about it.” 3
The majority of senior executives—talkless of a billionaire like Ray Dalio—would have fired Haskell on the spot for sending this email. Dalio however, was so pleased with it, that he circulated the email internally within Bridgewater.
“Radical open-mindedness and radical transparency are invaluable for rapid learning and effective change…The more open-minded you are, the less likely you are to deceive yourself—and the more likely it is that others will give you honest feedback…It can also be difficult because being radically transparent rather than more guarded exposes one to criticism. It’s natural to fear that. Yet if you don’t put yourself out there with your radical transparency, you won’t learn.”
At Bridgewater, no employee has the right to hold a critical opinion without speaking about it. In fact, it’s a sackable offense to do so.
The majority of meetings are videotaped: all employees can review the recordings and share public feedback on the participants.
Outside of meetings, Bridgewater staff are obliged to rate one another’s performances and “Baseball Cards” publicly reveal each individual employees’ strengths and weaknesses based on feedback. 4
This type of “Radical Transparency” is the driving force behind the philosophy of idea meritocracy—the encouragement of thoughtful disagreements and the promotion of a culture where the best ideas win out.
It may come as a surprise to learn that the most innovative companies in the world are also built on this philosophy.
For example, whilst working as the Executive Chairman of Google, Eric Schmidt built upon the existing culture of open criticism of ideas regardless of hierarchy, which led to innovations like gmail, adsense and google maps. 5
In the same breath, the innovative media company, Netflix, encourages employees to give one another blunt feedback, and openly shares all employees’ salaries to executives director-level and above. 6
The idea of “Radical Transparency” may seem like a harmful practice, but research has shown that avoiding criticism—instead of embracing it—leads to bad decision-making, poor performance and failure.
For example, one study discovered that whilst a firm undergoes poor performance, the Chief Executive Officers (CEOs) tend to seek comfort and advice from like-minded executives of other firms, and avoid receiving feedback from critics outside their social circle. 7
This avoidance of criticism inhibits the organization’s ability to change corporate strategy, leading to organizational decline and a downward spiral in performance.
Another study conducted by Francesca Gino, Professor at Harvard Business School, highlighted an employees tendency to drop relationships with people who provide feedback that is more negative than their view of themselves, and surround themselves with people who reaffirm their positive traits. 8
Ironically, the study discovered that employees who avoided criticism performed much worse in the subsequent year, than those who refrained from confirmation-seeking behavior.
By avoiding criticism and running towards praise, we fail to see the pitfalls that lead to our downfall because our greatest weaknesses are often the opposite of our greatest strengths.
Avoid Criticism at Your Peril
“Every time you confront something painful, you are at a potentially important juncture in your life—you have the opportunity to choose healthy and painful truth or unhealthy but comfortable delusion.”
― Ray Dalio
Conventional wisdom suggests that success is the by-product of surrounding ourselves with positive people who cheer us along and support our ideas.
But this doesn’t hold up to close scrutiny, in fact the opposite is more likely to be true: surrounding yourself with smart people who disagree with you will improve your odds of success.
The irony of criticism is that the more we run away from critics and towards cheerleaders, the more delusional we become about our strengths and weaknesses, and the less likely we’ll succeed.
And more times than not, our biggest critics open the door to crucial opportunities to learn, improve and make better decisions.
Several years after the near bankruptcy of Bridgewater, Ray Dalio said he’d learned that, “no matter how confident I was in making any one bet I could still be wrong.”
His idea of Radical Transparency is driven by a genuine worry that you may be blindsided by cognitive biases that lead to bad decision-making.
It’s an acknowledgement of the reality of dialogue between two people with conflicting views: someone is less wrong than the other, and it pays to find out if that someone isn’t you.
When you can leave your ego outside the door and give room for open criticism, your focus and energy shifts towards what matters most. That is, being right (even if it doesn’t come from you).
Next time you’re faced with criticism and negative feedback, remember the thought-provoking question that launched Dalio’s long-term success with Bridgewater:
“How do I know I’m right?”
1. Dalio helped McDonald’s reduce its price risk, which led to the creation of the McNugget in 1983.
2. Dalio was so broke that he had to borrow $4,000 from his father to take care of his family and pay the bills.
4. As an example, Kiran Rao, a manager at Bridgewater, was declared as the company’s worst manager in front of 200 of his colleagues.
5. Eric Schmidt’s Master of Scale Interview.
6. Wall Street Journal article.
7. Getting by with the Advice of Their Friends: CEOs’ Advice Networks and Firms’ Strategic Responses to Poor Performance. Michael L. McDonald and James D. Westphal. Administrative Science Quarterly. Vol. 48, No. 1 (Mar., 2003), pp. 1-32
8. Green, P., Gino, F., & Staats, B. (2017). Shopping for Confirmation: How Disconfirming Feedback Shapes Social Networks. Harvard Business School Working Paper, No. 18-028.