Notes - Principles

August 31, 2024

Part 1 - The Importance of Principles

Chapter 1: WHAT ARE PRINCIPLES?

Defining Principles

Principles are concepts that can be applied over and over again in similar circumstances, as distinct from narrow answers to specific questions. They function as ways of successfully dealing with the laws of nature or the laws of life.

The Role of Principles and Values

Principles connect your values to your actions, acting as beacons that guide your behavior. Your values are defined as what you consider important, or literally what you "value". Principles allow you to live a life consistent with those values. They are the resource you turn to when faced with difficult choices.

Scope of Principles

Different types of principles exist for various aspects of life, such as "skiing principles," "parenting principles," "management principles," and "investment principles". Additionally, there are over-arching "life principles" that influence all your approaches. Those who understand and master principles are able to interact with the world more effectively than those who do not.

Chapter 2: WHY ARE PRINCIPLES IMPORTANT?

Success Requires Principles

All successful people operate by principles that contribute to their success.

Consequences of Operating Without Principles

For individuals, lacking principles means being forced to merely react to circumstances as they arise without considering what they value most or how to make choices to achieve their desires, ultimately preventing them from maximizing their life.

For groups (such as companies), operating without principles is even worse. It leads to individuals "randomly bumping into each other" because they lack a shared understanding of their values and the corresponding expected behavior.

Chapter 3: WHERE DO PRINCIPLES COME FROM?

Forging vs. Adopting Principles

Principles can originate in two ways: individuals can forge their own principles, or they can accept the principles of others. Holistic packages of principles, such as religious or legal systems, are common examples of accepting others' principles.

The Risk of Adoption

Although accepting existing principles is not inherently bad, as they often contain significant accumulated wisdom, adopting pre-packaged principles without much thought poses a risk. This risk is that the adopted principles may be inconsistent with your true values.

Conflict and Integrity

Inconsistency between values and principles can lead to conflict between values and actions, as seen in a hypocrite whose behavior contradicts their claimed religious teachings. Your principles must accurately reflect the values you genuinely believe in. The author also notes that the principles most valuable to each individual are those derived from their own encounters with reality and subsequent reflections on those encounters, rather than merely being taught and accepted.

Chapter 4: DO YOU HAVE PRINCIPLES THAT YOU LIVE YOUR LIFE BY? WHAT ARE THEY?

Principles Define Behavior

Your principles are what determine your standards of behavior.

Principles in Relationships

In relationships, the interaction between individuals is governed by both their respective principles. People whose values and principles are shared tend to get along, while a lack of alignment leads to constant misunderstandings and conflict. In many relationships, people’s principles are too often unclear. The reader is asked to consider if the values of the people closest to them are aligned with their own and what they value most deeply.

Chapter 5: HOW WELL DO YOU THINK THEY WILL WORK, AND WHY?

The Refinement Process

The most valuable principles are those derived from our own experiences and reflections upon them. We refine these principles by confronting hard choices and asking difficult questions.

Examples of Principle Refinement

Governmental Ethics: When representatives in Washington investigate ethical behavior, they grapple with complex questions, such as whether the government should punish bad ethics or solely focus on writing and enforcing laws. These assessments lead to principles (in this case, defining the nature of government) that can be applied to similar situations in the future.
Personal Morality (Theft): A principle like "I won’t steal" must be consistent with your underlying values to be most effective. Consistency requires asking: Why?. For example, is the motivation driven by empathy for the victim, or fear of getting caught?. Asking such questions refines understanding and aligns the principle better with core values.

Decision-Making and Leadership

Success requires making correct, difficult choices. Leaders, especially, must be capable of making tough decisions, such as being able to "cut off a leg to save a life," for the sake of the individual or the group. Great leaders make these choices based on understanding and caring for their people, not by simply following their people.

Guidance to the Reader

The author presents his principles for the reader to carefully consider and try operating by as part of their personal process of discovering what works best. The hope is that the reader’s exploration, coupled with increased usage, will cause these ideas to evolve from "Ray’s principles" into "our principles" or "my principles" for the individual. The reader is encouraged to approach every principle by asking: “Is it true?”.

Part 2 - My Most Fundamental Life Principles

Chapter 1: WHERE I’M COMING FROM

The Author's Background and Approach to Life

The author shares his background to provide context for his principles, recognizing that everyone is a product of their genes and environment and approaches the world with biases.

He grew up on Long Island, the only son of a jazz musician and a stay-at-home mother. He was an ordinary kid and a less-than-ordinary student, disliking the rote memorization required in school because he has (and still has) a bad rote memory. He preferred to work for what he wanted, not what others wanted him to do, and needed to figure things out for himself to be successful.

Early Experiences with Investing and Learning

Motivated by wanting spending money, he worked various jobs, including caddying starting at age 12. He began investing in the stock market during the booming 1960s after hearing caddied-for clients discuss it. His first stock, Northeast Airlines, tripled because it was acquired, leading him to initially think the game was easy. He quickly learned how difficult it is to be right and the costs of being wrong after losing money.

Lessons Learned from Trying to "Beat the Market"

The pursuit of beating the market taught him key lessons:

It is difficult to be confident in one's opinions; in markets, significant work can still lead to incorrect judgments.
Bad opinions are costly in the market, unlike in many social contexts, which led him to be cautious, realizing that certainty is elusive.
The consensus is often wrong, necessitating that he be an independent thinker to make money.

The Five-Point Approach Developed Early On

From age 12 onwards, he followed a core five-point approach:

Work for what he wanted, not for what others wanted him to do. He never felt forced to do anything, only what was necessary to get his desired outcome.
Form the best independent opinions he could muster to achieve his goals. For example, he ordered annual reports from all Fortune 500 companies via a tear-out coupon to analyze and form his own opinions on stocks.
Stress-test his opinions by having the smartest people challenge them to expose where he was wrong. He focused on the reasoning behind others' conclusions, not just the conclusions themselves.
Remain wary of overconfidence and effectively deal with "not knowing". He managed this by either gathering more information until confident, or by eliminating his exposure to the risks associated with uncertainty.
Wrestle with realities, reflect on the consequences of decisions, and learn and improve from this process.

This process taught him how important and liberating it is to think for himself. He believes this entire approach is the best way for others working with him to accomplish great things.

Education and Career Beginnings

He attended a local college he barely got into, where he thrived because he could study what interested him. He became interested in and learned to meditate, which he is sure enhanced his clarity, creativity, enjoyment, and success in learning.

After graduating college in 1971, he was accepted to Harvard Business School (HBS). In the summer before HBS, he clerked on the floor of the New York Stock Exchange during the breakdown of the global monetary system (Bretton Woods), a dramatic event that focused his interest on currency markets. He loved the case study method at HBS, as it fostered open-ended problem-solving and debate, leading to the best answers, rather than memorizing facts.

In the summer between HBS years, he worked for the Director of Commodities at Merrill Lynch, pursuing his interest in commodities futures. Trading commodities futures became popular during the inflationary surge of 1972-1973. Due to the shortage of people with a Harvard Business School background knowledgeable in commodities, he was hired as Director of Commodities at a brokerage, but the firm failed before the division launched. He moved to a bigger brokerage, managing institutional/hedging business, but was fired in 1975 for insubordination because he did not fit well into the organization. He started Bridgewater later that year.

Subsequent Learning Through Mistakes

Since starting Bridgewater, he learned more by making mistakes. Most importantly:

Failure is largely due to not accepting and successfully dealing with the realities of life; success is simply dealing with all realities.
Finding out what is true, including unpleasant truths like mistakes and personal weaknesses, is good because it allows these impediments to be dealt with.
There is nothing to fear from truth; knowing the truth, even scary truths (like having a deadly disease), allows for better dealing with the situation.
Being truthful and allowing others to be truthful is essential for learning because it exposes thoughts to necessary feedback.
Being truthful is an extension of personal freedom; people who are internally one way and externally another become conflicted, unhappy, and unable to be at their best.
He wants people to say what they truly believe and listen to others to find out what is true.
A major source of societal problems is people holding wrong, critical theories about others that they refuse to test by talking to the relevant people; instead, they talk behind backs, which is unethical, unproductive, and hateful.
He learned to love real integrity (saying what one believes) and despise the lack of it.
Everyone makes mistakes and has weaknesses; the key differentiator is the approach to handling them.
Mistakes have an "incredible beauty" because they contain a "puzzle" and a "gem" (a principle) that can be gained if solved, allowing for future mistake reduction.
Wrestling with problems, mistakes, and weaknesses is the training that provides strength and makes successes appreciated.
The popular "glossy photo" of success (e.g., Ivy League perfection) is inaccurate. Great people become great by looking at their mistakes and weaknesses and figuring out how to overcome them.
People who maximize the process of encountering reality, especially painful obstacles, learn the most and achieve their goals faster.
Being totally truthful, especially about mistakes and weaknesses, led to a rapid rate of improvement.

Differences from the Conventional Approach

He found his approach to be opposite of most others':

Most believe learning what is taught leads to success; he believes figuring out what you want and how to get it is better.
Most believe having answers is better; he believes having questions is better because it leads to more learning, and quick answer-givers often haven't considered all ways they could be wrong.
Most believe mistakes are bad; he believes they are good because most learning comes from making and reflecting on them.
Most believe finding weaknesses is bad; he believes it is good as it is the first step toward addressing them.
Most believe pain is bad; he believes pain is required to become stronger, though excessive pain can be crippling, and the right amount is consistent with achieving objectives.

Defining Success

His success indicators were never wealth or status (like being on the Forbes 400 list). Those outcomes were just residual results and not rewarding. What he wanted was an interesting, diverse life filled with learning, meaningful work, and meaningful relationships, which he achieved by following his five-point approach.

Chapter 2: MY MOST FUNDAMENTAL PRINCIPLES

Hyperrealism and the Pursuit of Truth

Life is viewed as a river of unavoidable encounters with reality requiring decisions. To achieve goals, one must accept realities rather than wish them away, and learn to work with them rather than fight them. Understanding reality—from human behavior to material cause-and-effect—provides the power to improve the odds of success. He defines himself as a "hyperrealist".

Dreams and Laws of the Universe

Hyperrealism is the best path to choosing and achieving dreams. Dreamers who succeed see what's possible and figure out how to make it happen; idealists not grounded in reality create problems, not progress.

The author believes there are infinite laws of the universe, and progress is achieved by operating consistently with them. These laws are provided by nature, not created by man, who can only hope to understand and use them. Success is achieved by people who deeply understand reality and use it to their advantage. For example, communism failed because it was an idealistic system inconsistent with human nature.

Fundamental Principle: Truth

The most fundamental principle is that truth (an accurate understanding of reality) is the essential foundation for producing good outcomes. He studies nature because it offers innumerable lessons, showing a perfection and brilliance that staggers him. Man's intelligence relative to nature is compared to "a mold growing on an apple".

The Non-Traditional Sense of "Good" and "Bad"

By observing what is universally rewarded and punished in nature and humanity, he learned more about "good" and "bad" than by listening to popular views, which often reflect specific group preferences and idealized versions of the world.

"Good" means operating consistently with the natural laws.
"Bad" means operating inconsistently with these laws.

If something, even morality, conflicts with reality, it is "bad" because it will not produce good outcomes.

Evolution and Self-Interest

The example of hyenas killing a young wildebeest illustrates that seemingly terrible behavior is often integral to nature's complex, efficient, and long-working system. The second- and third-order consequences show this behavior is good for the hyenas (self-interest) and for the greater system, as it fosters evolution (the natural process of improvement). If that dynamic were changed, the overall outcome would be worse.

Evolution is the greatest single force in the universe, and it is good because it leads to adaptation and improvement. The desire to evolve (to get better) is probably humanity’s most pervasive driving force, seen in the satisfaction of mastering a job or a sport. The things people strive for (e.g., toys, money, status) are merely the "bait" to make them evolve; the evolution is what matters, not the reward itself.

This is due to the law of diminishing returns: once basic needs are met, acquiring more of something yields little or no marginal utility and can bring negative consequences, like gluttony. Therefore, seeking new things or new depths of old things is required for satisfaction.

The Personal Evolutionary Process Sequence

The sequence that fulfills most people and moves society forward is:

Seeking new things (goals).
Working and learning in the process of pursuing these goals.
Obtaining these goals.
Repeating this over and over.

Pursuing self-interest in harmony with the laws of the universe and contributing to evolution is universally rewarded ("good"). Self-interest and society's interests are generally symbiotic, as self-interest motivates people to do difficult things that benefit both themselves and society. Society rewards those who provide what it wants; the money earned is a rough measure of societal contribution, not the desire to make money.

This productive adaptation process is crucial when dealing with setbacks, which are inevitable. People who adapt appropriately and quickly to setbacks often end up as happy as before. Adaptation is a major part of the evolutionary process and is rewarded, making highly successful people those who recognize changes and adapt best.

Man's Unique Ability to Evolve

While all things in nature have innate attributes that are both helpful and harmful depending on their use (e.g., the aggressiveness of a lion), man's distinguishing feature is a greater ability to learn, allowing faster evolution.

Most people are born with mixed attributes (e.g., highly creative people may struggle with details; pragmatic people may lack creativity). Happiness and success depend on knowing oneself (values and abilities) and finding the right fits. The most important quality differentiating successful from unsuccessful people is the capacity to learn and adapt.

Ego Barriers and the Amygdala

Man's prefrontal cortex allows objective reflection on oneself, especially weaknesses, enabling faster evolution. However, defensive, emotional reactions ("ego barriers") often impede this progress. These reactions originate in the amygdala, triggering "fight or flight" responses when weaknesses are exposed.

Most people avoid reflecting on their weaknesses.
Most dislike others pointing out their weaknesses, perceiving it as an attack.
Most avoid helping others explore their weaknesses, preferring to talk behind their backs.

These failures to overcome ego barriers are considered the biggest single problem of mankind as they impede problem-solving and are a great source of pain. Aristotle defined tragedy as a bad outcome due to an unaddressed "fatal flaw," making it tragic when ego barriers lead to bad outcomes.

Chapter 3: THE PERSONAL EVOLUTIONARY PROCESS

Decisions and Success

Life consists of numerous choices, and the quality of life depends on the quality of decisions made. Decision-making ability is learned, not innate. The path to achieving dreams is through constant engagement with reality, using encounters to learn and adapt.

The formula for success is: Reality + Dreams + Determination = A Successful Life.

Success is defined as getting what you want, and the goal is to be clear about that and figure out how to get it.

Defining Happiness and Fulfillment

For most people, success is evolving as effectively as possible (learning and changing to improve). Personal evolution is considered the greatest accomplishment and reward.

Happiness is determined more by how outcomes relate to expectations than by absolute conditions (e.g., an unexpected gain of $2,000 for a person worth $10,000 creates happiness more than a billionaire losing $200 million). This means that to remain happy, one must keep evolving and adjusting expectations.

Fulfillment requires meaningful work and meaningful relationships.

Chapter 4: YOUR MOST IMPORTANT CHOICES

The quality of life is radically affected by five major types of choices made continually. Choosing well is dependent on character (the ability to do the difficult things that produce desired results), which the author believes most people can develop.

FIRST: Choosing How to React to Pain

To evolve, one must push one's limits, which is painful; pain is nature's messaging device signaling limits. Gaining strength requires pushing these limits.

Most people react badly to pain (fight or flight), striking out or running away, thus failing to learn and making little progress.
Those who react well seek to understand the cause of the pain and dispose of the barrier, gaining strength and satisfaction.
Since most learning comes from making mistakes and reflecting on causes, developing a knee-jerk reaction to pain that is to reflect rather than fight or flee leads to rapid learning and evolution.

Pain + Reflection = Progress.

SECOND: Choosing Whether to Accept Reality

People who confuse what they wish were true with what is true create distorted pictures of reality, making it impossible to make the best choices and preventing them from dealing properly with "harsh realities". In contrast, those who know that understanding reality is the first step toward dealing with it make better decisions.

Ask yourself, “Is it true?” because knowing what is true is good.

THIRD: Choosing How to Handle Weaknesses

People who worry about looking good typically hide what they don't know and hide their weaknesses, ensuring those weaknesses remain impediments. They try to prove they have answers even when they don't, based on the senseless belief that great people lack weaknesses.

Great people have weaknesses but have learned how to deal with them.
The knowledge anyone lacks that could improve decisions is vastly greater than what anyone possesses.
People interested in the best decisions are rarely confident they have the best answers, so they seek to learn more (especially from believable people who disagree with them) and are eager to identify their weaknesses.

The author admits his biggest weakness is poor rote memory (names, numbers, spelling) and a dislike for repetitive, illogical tasks. His compensatory approach involves creating an environment with people who have good rote memories and using tools like a BlackBerry.

The question to ask is: How much do you worry about looking good relative to actually being good?.

FOURTH: Choosing How to Weigh Consequences

People who overweigh first-order consequences and ignore second- and subsequent-order consequences rarely reach their goals. First-order consequences often have the opposite desirability of second-order ones, leading to major mistakes.

Example: First-order consequence of exercise (pain, time-sink) is undesirable; second-order (better health, attractive appearance) is desirable. Food that tastes good is often unhealthy, and vice versa.
First-order consequences are often the temptations or barriers that cost people what they truly want.
Natural selection seems to penalize people who make decisions based only on first-order consequences.

People who choose what they really want and overcome the temptations and pains are more likely to have successful lives.

FIFTH: Choosing Responsibility for Outcomes

People who blame bad outcomes on anyone or anything other than themselves are inconsistent with reality and subvert their progress. Blaming others is wishing reality were different, which is "silly". This behavior diverts attention away from building personal strength needed for success.

Successful people understand that bad things happen to everyone and that it is their responsibility to make their lives what they want by dealing with whatever challenges arise. They know that nature is testing them and is not sympathetic.

Summary of Choices and Character

Achieving goals is mostly a matter of personal choice and character. Character is the ability to get oneself to do the difficult things that yield desired results. Pushing one's boundaries (operating in the "stretch zone") makes one stronger, and improvement leads to motivation. If one maintains the same level of "pain," they will naturally evolve at an accelerating pace.

The best advice is to ask: what do you want, what is true, and what should be done about it?.

Chapter 5: YOUR TWO YOUS AND YOUR MACHINE

Higher-Level Thinking

The most successful individuals are capable of "higher level thinking," which means stepping back to design a "machine" (consisting of the right people doing the right things) to achieve their goals. They objectively assess and improve this "machine" using a feedback loop that compares outcomes with goals.

The Strategic Self (You(1)) and the Doer Self (You(2))

Higher-level thinking requires seeing oneself objectively, as if looking down at the machine. The author conceptualizes two selves:

You(1): The designer and overseer of the plan to achieve goals (the strategic self).
You(2): One of the participants/resources in pursuing the mission (the doer self).

You(1)'s role is to design, operate, and improve the machine. If You(1) observes that You(2) is not capable of performing a task well, it is sensible to have someone else do it—even "firing yourself(2)" and replacing that resource. You(1) should be happy about finding the weakness because it improves the chances of achieving the goal.

The biggest mistake people make is not seeing themselves and others objectively. If they overcame this, they could live up to their potential.

Chapter 6: MY 5-STEP PROCESS TO GETTING WHAT YOU WANT OUT OF LIFE

There are five distinct steps required to get what you want out of life. The process is iterative, with each encounter with a problem leading to learning and making one progressively more capable.

The steps are:

Have clear goals (determining direction).
Identify and don’t tolerate the problems that stand in the way of achieving goals.
Accurately diagnose these problems (figuring out root causes).
Design plans that explicitly lay out tasks (determining the solutions).
Implement these plans (doing the tasks).

General Principles of the 5-Step Process

The steps must be approached as distinct steps; for example, when setting goals, only set goals and don't worry about how to achieve them yet. Blurring the steps leads to suboptimal outcomes.
Each step requires different talents and disciplines. If one is missing a talent or discipline, they can acquire it, supplement it, or compensate for it, provided they are honestly self-reflective and design around weaknesses.
The process must be approached in a clear-headed, rational way, rather than emotionally. If emotions interfere, one should take time out or seek guidance from calm, thoughtful others.
Treat life like a game or a martial art where the mission is to navigate challenges to achieve goals. Working through discomfort and reflecting on it improves the chance of getting what you want.
Life gives you what you deserve, not what you "like".
The first-order consequences of escaping challenges may be pleasurable, but the second- and third-order consequences (one's life) will eventually be painful.

Chapter 7: THE 5 STEPS CLOSE-UP

1) Setting Goals

You can have virtually anything you want, but you can’t have everything you want. Setting goals is the most important and difficult step because it forces a decision on what one truly wants, acknowledging the scarcity of time and resources.

Avoid pursuing too many goals simultaneously, as this leads to achieving few or none.
Prioritize, which requires rejecting good alternatives to pursue even better ones (time is often the greatest limiting factor).
Do not confuse "goals" with "desires." Goals are things you truly want to achieve (second- and third-order consequences), while desires are things that can prevent you from reaching goals (first-order consequences, e.g., the desire to eat unhealthy food undermining a fitness goal).
Avoid setting goals based on what you think you can achieve. At this stage, do not rule out a goal due to a superficial assessment of its attainability. Set the goal with faith that creative thinking and hard work can achieve it, building confidence as a track record develops.
Don't limit goals to what seems attainable because you can "cheat" by asking people around you for help or having them do things you don't do well. Total flexibility (good answers can come from anywhere) and total accountability (it is your job to find those answers) are required.
Great expectations create great capabilities. If failure occurs, it indicates insufficient creativity, flexibility, or determination, requiring a return to the drawing board.
Goals also include dealing with setbacks, minimizing loss, or dealing with irrevocable loss.
Goal-setting is best done by those skilled in big-picture conceptual thinking, synthesizing, visualizing, and prioritizing, but one can compensate for weaknesses with help from others.

2) Identifying and Not Tolerating Problems

After setting goals, problems encountered during the execution of the plan must be identified and diagnosed so the design can be modified.

Most problems are potential improvements screaming at you; the more painful the problem, the louder the scream. Success requires perceiving problems and not tolerating them.
Common reasons people fail to identify problems are rooted in a lack of will or lack of talent/skill:
- Problems are "harsh realities" that are unpleasant, so people subconsciously avoid them.
- Thinking about difficult problems causes anxiety.
- People often prioritize looking good over achieving results, avoiding the recognition that their own mistakes or weaknesses are the cause. They view weaknesses as permanent deficiencies rather than essential parts of personal evolution.
- Some people are simply not perceptive enough to see problems, or they cannot distinguish big problems from small ones.
Push through the pain of facing problems, viewing them as "growing pains". Look at problems as a detached observer. Identifying problems is like finding gems embedded in puzzles; solving the puzzle yields a principle for future improvement.
Be very precise in specifying problems because different problems have different solutions. For example, if the problem is lack of will, one must strengthen the will; if it is lack of skill/talent, solutions include training, assistance, or role changes.
Don't confuse problems with causes. A problem is a suboptimal outcome (e.g., "I am performing badly in my job because I am tired"); a cause might be "I can't get enough sleep".
Once problems are identified, they must not be tolerated. Tolerating problems may stem from believing they are unsolvable or not caring enough. If one is motivated (has the will to succeed), they can achieve success even without innate abilities, by getting help.

3) Diagnosing the Problems

Focusing on diagnosis and design is critical, avoiding the common mistake of quickly jumping from identifying a tough problem to a proposed solution.

Be calm and logical; emotional reactions undermine decision-making effectiveness.
Get at the root causes. Root causes are deep-seated reasons that manifest repeatedly behind actions causing problems. Finding them provides lasting dividends.
Distinguish root causes from proximate causes:
- Proximate causes are actions or lack of actions (e.g., "I missed the train because I didn’t check the schedule"). They are described via verbs.
- Root causes are the deeper reasons (e.g., "I didn’t check the schedule because I am forgetful"). They are described via adjectives, usually characteristics of the person.
Only removing root causes eliminates problems.
Many problems are caused by people’s mistakes, but ego and shortsightedness make identifying and accepting them painful. The reluctance to point out others' mistakes stunts personal evolution.
The willingness to look at oneself and others objectively is the key differentiator for people who live up to their potential.
The pain of objective self-assessment is called "growing pains"; those who understand this find "growing pleasures" in the discoveries. The connection between difficult behavior and rewards is difficult due to the natural tendency to prioritize short-term gratification (first-order consequences).
Pain + Reflection = Progress. Wrestling with problems, mistakes, and weaknesses is the necessary training.
The most important qualities for diagnosis are logic, the ability to see multiple possibilities, and the willingness to "touch people’s nerves" (discussing mistakes and weaknesses) to overcome ego barriers and find the truth.

4) Designing the Plan (Determining the Solutions)

Design occurs at two stages: creating the initial plan to achieve goals, and designing ways around problems encountered along the way. Most movement comes from designing solutions to remove the root causes of problems.

Creating a design is like writing a movie script: visualize who will do what through time to achieve the goal.
The objective is to change how things are done so that problems don't recur or recur less often. Think about how the "machine" (process/people) should be changed to produce good outcomes.
There are typically many workable paths to goals; you only need to find one.
Visualize the goal and the plan unfolding over time, connecting past, present, and future.
Write down the plan, specifying who does what and when. The plan (story) connects goals to tasks.
Designing is an iterative process involving alternating between sketching broad steps and filling in specific tasks, timelines, and implications. Specificity (who, what, when) is essential for visualization and action.
If the plan won't achieve what's necessary in the required time, one must either think harder (seeking advice) or reduce the goals.
Designing a good plan takes only a fraction of the time spent executing it (hours over days/weeks vs. execution time). Most people err by focusing too much on execution rather than design.
Successful designers have an ability to visualize and a practical understanding of how things really work.

5) Doing the Tasks

Execution requires the self-discipline to follow the "script" (the design).

Great planners who don't execute go nowhere.
Good work habits are highly important, involving prioritized to-do lists and the discipline to do what needs to be done, even disliked tasks.
Establish clear benchmarks to measure if the plan is being followed, ideally with objective external measurement. If not, diagnose the problem and resolve it.
Successful implementers are self-disciplined, proactive, results-oriented, and push themselves over the finish line. They diagnose when daily tasks divert them from the plan.
One can succeed even if poor at execution by forming symbiotic relationships with reliable task-doers.
Push through the discomfort; in the long run, doing difficult things to succeed is easier than being unsuccessful.

Chapter 8: THE RELATIONSHIPS BETWEEN THESE STEPS

Connecting Goals and Tasks

Tasks and designs exist only to achieve goals. People often fail because they feel good about doing tasks but forget the goals, leading to failure. To remember the connection, constantly ask, “Why?”.

The Iterative Nature

The 5-Step Process is iterative: information gained in one step (e.g., identifying problems) might lead to modifying other steps (e.g., revising the design).

If the process works well, goals change much more slowly than designs, which change more slowly than tasks.
Tasks and designs can change often, but goals require consistent effort.
People with problems often handle the steps backward, sticking rigidly to tasks and lacking commitment to goals.

Chapter 9: WEAKNESSES DON’T MATTER IF YOU FIND SOLUTIONS

The Importance of Finding Weaknesses

Everyone has weaknesses; the main difference between successful and unsuccessful people is that successful people find and address them. The best advice remains: ask what you want, what is true, and what should be done about it.

Why Weaknesses are Hidden

It is difficult to see one's own blind spots for two main reasons:

Ego barriers: Most people avoid looking for weaknesses because society teaches that having them is painful or bad.
Lack of perception: Having a weakness is like missing a sense—it is difficult to perceive what you are missing.

Because of this, having others point out what is missing can be painful, but it is essential for progress.

Compensating for Weaknesses

Being weak at any step of the process is not an insurmountable problem if you understand the weakness and successfully compensate for it by seeking help. People weak at one step (e.g., goal-setting) can partner with someone strong in that area (e.g., doing tasks) to be more successful together.

The 5-Step process can be used as a diagnostic tool if goals are not being achieved: identify the failing step, the qualities required for success in that step, and the missing qualities.

The whole process shows the relationship: Values → 1) Goals → 2) Problems → 3) Diagnoses → 4) Designs → 5) Tasks. Success requires success at all five steps, which often necessitates putting aside ego, reflecting objectively, and seeking help from others.

Part 3 - My Management Principles

Chapter 1: MANAGEMENT PRINCIPLES IN GENERAL

Organizational Foundation: Culture and People

The book stresses that having principles that work is essential for groups (like companies) as it is for individuals. When people work in a group, they must agree on the group’s values and principles; otherwise, confusion and eventual gravitation toward population averages will result.

An organization's results are primarily determined by its people and its culture. Therefore, a great company requires making two things great: the culture and the people.

The Organizational Machine and Feedback Loop

Every organization functions as a "machine" to achieve its goals. This machine produces outcomes that must be constantly compared to the goals to assess its function. This comparison creates a feedback loop crucial for improvement.

The organizational machine has two main components: the culture and the people. If outcomes are inconsistent with goals, something is wrong with the machine (culture and/or people). By diagnosing the problem, designing improvements, and implementing those improvements, the machine evolves.

The more frequently and effectively this evolutionary process is utilized by those within the organization, the faster the organization and its people will evolve. The effectiveness of this process, or how well organizations manage their feedback loops, is the most important difference between great organizations and bad ones.

Bridgewater's Culture and People: An Extension of Life Principles

Bridgewater's culture and people are extensions of the author's fundamental life principles discussed in Part 2. The core values prioritized are meaningful work and meaningful relationships, achieved by striving for truth and excellence with great people.

The principles guide people at Bridgewater to collectively:

Work for what they want and not for what others want of them.
Form the best independent opinions they can muster to move toward goals.
Stress-test their opinions by having the smartest people challenge them to find errors.
Be wary about overconfidence and good at not knowing.
Wrestle with reality, reflect on the results of their decisions, and continuously improve.

This approach is considered logical because the cause-effect relationships produce good results, and it has been verified by 40 years of testing.

The practical application of these principles is summarized in over 200 principles intended to cover virtually all management problems. These principles are meant to be used as a reference book rather than read cover-to-cover, given their specificity.

Chapter 2: TO GET THE CULTURE RIGHT...

This chapter focuses on principles related to building a culture based on truth, openness, and learning from mistakes.

Trust in Truth (Principles 1-7)

Trust and Fear of Truth (Principles 1-3)

Trust in Truth is foundational. Managers must realize that they have nothing to fear from truth. Understanding and accepting reality, even when scary (like having a weakness or deadly disease), allows for better dealing with the situation. Being truthful and letting others be completely truthful exposes everyone to essential feedback for learning. Duality—being one way inside and another way outside—leads to conflict, unhappiness, and inability to be at one's best.

Managers must create an environment where everyone has the right to understand what makes sense, and no one has the right to hold a critical opinion without speaking up about it.

Radical Openness and Integrity (Principles 4-7)

The culture must be extremely open (Principle 4). Openness fosters truth and trust, especially concerning what people dislike, as these things need resolution. Bridgewater's success stems from people having the power to speak openly and equally, with views judged on merit, leading to better problem-solving and greater commitment.

Integrity (being "one" inside and out) is demanded. Focusing on what is accurate rather than how it is perceived improves efficiency and camaraderie, as secret thoughts breed resentment.

Never say anything about a person you wouldn’t say to them directly, and don’t try people without accusing them to their face (Principle 5a). This badmouthing is counterproductive and shows a serious lack of integrity. At Bridgewater, it is considered the second-worst thing after dishonesty.
Don’t let "loyalty" stand in the way of truth and openness (Principle 5b). Unhealthy loyalty hides mistakes, while healthy loyalty fosters improvement by openly addressing challenges.

Be radically transparent (Principle 6) by providing people with maximum exposure to what is happening so they can form their own views and enhance accuracy.

Record almost all meetings and share them with all relevant people (Principle 6a). This enhances transparency, although confidential information must be protected.

Don't tolerate dishonesty (Principle 7). Total honesty is necessary for progress.

Don't believe it when someone caught being dishonest says they have seen the light (Principle 7a). The cost of retaining a dishonest person likely outweighs any benefit.

Mistakes as Learning Opportunities (Principles 8-19)

Embracing Mistakes (Principles 8-10)

Managers must create a culture where it is OK to make mistakes, but unacceptable not to identify, analyze, and learn from them (Principle 8).

Effective, innovative thinkers will make mistakes and learn from them as a natural part of innovation (Principle 9). Every learned mistake can save thousands of similar mistakes in the future. Treating mistakes as learning opportunities creates a healthy environment, whereas viewing them as bad leads to misery and prevents growth.
Do not feel bad about your mistakes or those of others. Love them! (Principle 10). Mistakes are expected, they are the first part of the learning process, and feeling bad prevents improvement. People who focus on bad outcomes rather than the evolutionary process miss the point. Great people, like Michael Jordan, use mistakes to improve, but many people, especially recent graduates, let ego stand in the way of mistake-based learning.

Diagnosing Weaknesses and Removing Ego (Principles 11-16)

Observe the patterns of mistakes to see if they are a product of weaknesses (Principle 11). A pattern signifies a weakness, which may be due to deficiencies in learning (fixable over time) or deficiencies in abilities (virtually impossible to change). Neither is an impediment if accepted and designed around.

Do not feel bad about your weaknesses or those of others (Principle 12). Weaknesses are opportunities for improvement; solving the "puzzle" of the weakness yields a valuable principle ("gem").

Don't worry about looking good - worry about achieving your goals (Principle 13). If one feels bad after finding a mistake, it indicates they prioritize looking good over actually being good; accurate criticism should be appreciated.

Get over "blame" and "credit" and get on with "accurate" and "inaccurate" (Principle 14). What happened is in the past; only its usefulness for future learning matters. Worrying about blame/credit impedes the iterative learning process.

Don't depersonalize mistakes (Principle 15). Saying "We didn't handle this well" rather than "Harry didn't handle this well" is a common, dysfunctional, and dishonest error driven by ego sensitivity. Since individuals are the building blocks, mistakes must be connected to the specific person responsible.

Write down your weaknesses and the weaknesses of others (Principle 16). Hiding them slows progress, while confronting them leads to evolution.

Reflection and Self-Improvement (Principles 17-19)

When you experience pain, remember to reflect (Principle 17). Reflection converts the pain of seeing mistakes into pleasure. The formula is: Pain + Reflection = Progress. Embracing failures is the first step toward genuine improvement.

Be self-reflective and make sure your people are self-reflective (Principle 18). This quality differentiates those who evolve fast. When pain strikes, the natural instinct is "fight or flight"; self-reflective people reflect instead, calming themselves to think clearly about the dilemma and achieve progress.

Teach and reinforce the merits of mistake-based learning (Principle 19). Managers must foster a culture where mistakes are brought into the open and penalized if covered up.

The issues log is the most valuable mandatory tool for identifying and learning from mistakes (Principle 19a).

Constantly Get in Synch (Principles 20-36)

Purpose of Synchronization (Principles 20-23)

Constantly get in synch about what is true and what to do about it (Principle 21). Synchronization involves asking, debating, discussing, and teaching to find better answers, clarify strengths/weaknesses/values, and define responsibilities and game plans.

Conversations should center on "Is it true?" and "Does it make sense?" (Principle 22). Everyone has the right and obligation to ensure collective actions make sense to them.

Fight for right (Principle 23) by debating important issues openly until the best answers are determined, maximizing learning and mutual understanding.

Assertiveness and Open-Mindedness (Principles 24-25)

Be assertive and open-minded at the same time (Principle 24). The goal is to find what is true, not to "win". Finding out you are wrong is more valuable than being right because it leads to learning.

Ask yourself whether you have earned the right to have an opinion (Principle 24a). Opinions are easy to produce, so bad ones are common.
Recognize that you always have the right to have and ask questions (Principle 24b).
Distinguish open-minded people from closed-minded people (Principle 24c). Open-minded people seek to learn and recognize they might be wrong, while closed-minded people tell you what they know and are uncomfortable around those who know more.
Don't have anything to do with closed-minded, inexperienced people (Principle 24d). They waste time and need to open their minds first.
Be wary of the arrogant intellectual who comments from the stands without having played on the field (Principle 24e).
Watch out for people who think it's embarrassing not to know (Principle 24f). These people are dangerous.

Make sure responsible parties are open-minded about the questions and comments of others (Principle 25). They must explain their thinking transparently. Disagreements may be appealed to a manager's boss or a knowledgeable group, who must resolve the dispute objectively to maintain a meritocracy of ideas.

Conflict, Debate, and Decision-Making (Principles 26-29)

Recognize that conflicts are essential for great relationships (Principle 26). Conflicts help determine if principles are aligned and differences can be resolved, either drawing people closer together or pushing them apart. Suppressing "mini-confrontations" leads to wider gaps and major clashes later.

Expect more open-minded disagreements at Bridgewater (Principle 26a) as they fuel learning.
There is giant untapped potential in disagreement, especially between thoughtful people (Principle 26b).

Know when to stop debating and move on to agreeing about what should be done (Principle 27). Avoid wasting hours arguing over details when the major issues are agreed upon.

If people disagree on the importance of debating something, it should be debated (Principle 27a).
Recognize that "there are many good ways to skin a cat" (Principle 27b); assessment should be based on efficacy, not alignment with one's own method.
For disagreements to be positive, they must be viewed within a broader context (Principle 27c).
Distinguish between idle complaints and complaints meant to lead to improvement (Principle 27d).

Appreciate that open debate is not meant to create rule by referendum (Principle 28). It is meant to provide the decision-maker with alternative perspectives.

Evaluate whether an issue calls for debate, discussion, or teaching (Principle 29). The approach should reflect the goal and the relative believability of those involved.

Make clear which kind of conversation you are having to avoid confusion (Principle 29a).
Communication aimed at getting the best answer should involve the most relevant people (Principle 29b).
Communication aimed at educating or boosting cohesion should involve a broader set of people (Principle 29c). Excluding less believable, highly opinionated people drives their views underground.

Believability and Communication Management (Principles 30-36)

Don't treat all opinions as equally valuable (Principle 30). Opinions from people without track records are not equal to those with strong track records; a hierarchy of merit is essential for a meritocracy of ideas and time management (Principle 30a).

Consider your own and others’ "believabilities" (Principle 31). Believability is roughly assessed by the quality of reasoning and track record.

People who have repeatedly and successfully accomplished the thing in question and have great explanations when probed are most believable (Principle 31b).

Spend lavishly on the time and energy you devote to "getting in synch" (Principle 32), as it is the best investment.

If it is your meeting to run, manage the conversation (Principle 33).

Make it clear who the meeting is meant to serve and who is directing the meeting (Principle 33a).
Make clear what type of communication you are going to have (Principle 33b).
A small group (3 to 5) of smart, conceptual people seeking the right answers in an open-minded way will generally lead to the best answer (Principle 33d).
1+1=3 (Principle 33e): Two effective collaborators are about three times as productive as they would be independently.
Navigate the levels of the conversation clearly (Principle 33f), moving between the "case at hand" and the relevant "principles/machine" level.
Watch out for "topic slip" (Principle 33g).
Enforce the logic of conversations (Principle 33h).
Worry about substance more than style (Principle 33i).
Achieve completion in conversations (Principle 33j).
Have someone assigned to maintain notes in meetings and make sure follow-through happens (Principle 33k).
Be careful not to lose personal responsibility via group decision-making (Principle 33l).

Make sure people don’t confuse their right to complain, give advice, and debate with the right to make decisions (Principle 34). Debate is encouraged, but decision-making authority belongs to the responsible party.

Recognize that getting in synch is a two-way responsibility (Principle 35), involving the responsibility to transmit and receive information accurately.

Escalate if you can’t get in synch (Principle 36) to an agreed-upon third party (manager or knowledgeable person) who can resolve the conflict objectively.

Chapter 3: TO GET THE PEOPLE RIGHT...

This section focuses on finding, managing, and evolving the people who constitute the organization's "machine."

Responsible Parties and Organizational Design (Principles 37-43)

The most important decisions you make are who you choose to be your Responsible Party (RP) (Principle 37). Almost everything good comes from having great people operating in a great culture (Principle 38).

First, match the person to the design (Principle 39) by visualizing the job, the qualities needed, and then ascertaining if the person has them.

Most importantly, find people who share your values (Principle 39a), such as a drive for excellence, truth at all costs, ownership, and strong character.
Look for people who are willing to look at themselves objectively and have character (Principle 39b).
Conceptual thinking and common sense are required to assign someone responsibility for achieving goals (as distinct from tasks) (Principle 39c).

The inevitable responsible party is the person who bears the consequences of what is done (Principle 40). The RP must choose wisely when delegating, incentivize, and manage appropriately.

By and large, you will get what you deserve over time (Principle 41).

The most important responsible parties are those who are most responsible for the goals, outcomes, and machines (those higher in the pyramid) (Principle 42).

Choose those who understand the difference between goals and tasks to run things (Principle 43). Otherwise, the manager will have to do their job for them.

Recognizing Differences in People (Principles 44-51)

Recognize that people are built very differently (Principle 44). Managers must consider their very different values, abilities, and skills (Principle 45).

Values (deep-seated beliefs) are most important for long-term relationships; Abilities (ways of thinking/behaving, e.g., creativity or logic) come next; and Skills (learned tools) are least important.

Understand what each person who works for you is like (Principle 46), and recognize that the type of person must match the job requirements (Principle 47).

Managers can use personality assessment tests and quality reflections on experiences to help identify these differences (Principle 48).

Understand that different ways of seeing and thinking make people suitable for different jobs (Principle 49).

People are best at jobs that require what they do well (Principle 49a).
If someone is not naturally good at one type of thinking, they must work with someone who has that required way of thinking or try to learn it (Principle 49b).

Don't hide these differences; explore them openly (Principle 50) to correctly assign people to roles.

Remember that people who see things and think one way often have difficulty communicating with those who think another way (Principle 51).

Hiring Right (Principles 52-63)

Hire right, because the penalties of hiring wrong are huge (Principle 52).

Weigh values and abilities more heavily than skills (Principle 54).

Write the profile of the person you are looking for into the job description (Principle 55).

Select the appropriate people and tests for assessing these qualities (Principle 56).

Interviewers tend to pick people like themselves, so pick interviewers who can identify the qualities needed (Principle 56a).
Performance in school, while valuable for assessing memory and processing speed, doesn't tell you much about common sense, vision, creativity, or decision-making (Principle 56e).

Look for people who have lots of great questions (Principle 57), which are often more important than great answers.

Don't hire people just to fit the first job; hire people you want to share your life with long-term (Principle 59).

Look for people who sparkle, not just "another one of those" (Principle 60).

Hear the click (Principle 61): find the right fit between the role and the person.

Pay for the person, not for the job (Principle 62).

Recognize that no matter how good you are at hiring, there is a high probability that the person you hire will not be the great person you need (Principle 63). Therefore, continue the "interviewing" process intensely after hiring.

Management as Operating a Machine (Principles 64-89)

Manage as someone who is designing and operating a machine to achieve the goal (Principle 64).

Understand the differences between managing, micromanaging, and not managing (Principle 65). Managing means understanding and constantly improving people and designs.

Managing should feel like "skiing together," involving close contact, oversight, and feedback.
An excellent skier is probably going to be more critical and a better critic of another skier than a novice (Principle 65b).

Constantly compare your outcomes to your goals (Principle 66).

Look down on your machine and yourself within it from the higher level (Principle 67).

Connect the case at hand to your principles for handling cases of that type (Principle 68).

Conduct the discussion at two levels when a problem occurs: 1) the "machine" level (why did the process fail?) and 2) the "case at hand" level (what to do now?) (Principle 69).

Don't try to be followed; try to be understood and to understand others (Principle 70). Control should not come from orders, but from constantly getting in synch about what is true and best.

Clearly assign responsibilities (Principle 71).

Hold people accountable and appreciate them holding you accountable (Principle 72).

Distinguish between failures where someone broke their "contract" from ones where there was no contract (Principle 72a).

Avoid the "sucked down" phenomenon (Principle 73), where a manager is pulled down to do a subordinate's tasks without addressing the root problem.

Watch out for people who confuse goals and tasks (Principle 73a).

Think like an owner (Principle 74).

Force yourself and the people who work for you to do difficult things (Principle 75). This is required to produce excellence.

Don't worry if your people like you; worry about whether you are helping your people and Bridgewater to be great (Principle 76).

Know what you want and stick to it if you believe it's right (Principle 77).

Communicate the plan clearly (Principle 78).

Have agreed-upon goals and tasks that everyone knows (Principle 78a).
Watch out for the unfocused and unproductive "we should ... (do something)" (Principle 78b), as this masks personal responsibility.

Constantly get in synch with your people (Principle 79).

Avoid staying too distant (Principle 81).

Tool: Use daily updates as a tool for staying on top of what your people are doing and thinking (Principle 81a).

Learn confidence in your people—don’t presume it (Principle 82).

Vary your involvement based on your confidence (Principle 83).

Avoid the "theoretical should" (Principle 84), which occurs when a manager theorizes that people should be able to do something they can't.

Care about the people who work for you (Principle 85).

Logic, reason, and common sense must trump everything else (Principle 86).

While logic drives decisions, feelings are very relevant (Principle 87).

Escalate when you can’t adequately handle your responsibilities (Principle 88), and ensure your people do the same.

Make sure your people know to be proactive (Principle 88a).
Tool: An escalation button should be used to clearly convey to the manager that the managee is escalating (Principle 88b).

Involve the person who is the point of the pyramid when encountering material cross-departmental or cross sub-departmental issues (Principle 89).

Probing Deeply (Principles 90-99)

Probe deep and hard to learn what to expect from your "machine" (Principle 90).

Constantly probe the people who report to you, and encourage them to probe you (Principle 92). Inviting criticism brings subterranean discontent to the surface and makes employees responsible for finding solutions.

Remind people that problems and mistakes are fuel for improvement (Principle 92a).

Probe to the level below the people who work for you (Principle 93).

Remember that few people see themselves objectively (Principle 94).

Probe so that you have a good enough understanding of whether problems are likely to occur before they actually do (Principle 95).

Don't "pick your battles." Fight them all (Principle 96). Resolving small badnesses may prevent more serious problems and reinforces desired behavior.

Don't let people off the hook (Principle 97).

Don't assume that people's answers are correct (Principle 98). Double-checking helps people learn to be more accurate and helps managers assess reliability.

Make the probing transparent rather than private (Principle 99).

Evaluating People (Principles 100-116)

Evaluate people accurately, not "kindly" (Principle 100).

Make accurate assessments (Principle 101).

Use evaluation tools such as performance surveys, metrics, and formal reviews to document performance (Principle 101a).
Maintain "baseball cards" and/or "believability matrixes" for your people (Principle 101b).

Evaluate employees with the same rigor as you evaluate job candidates (Principle 102).

Know what makes your people tick (Principle 103) by developing a full profile of their values, abilities, and skills.

Recognize that while most people prefer compliments over criticisms, there is nothing more valuable than accurate criticisms (Principle 104).

Provide constant, clear, and honest feedback (Principle 106).

Convincing people of their strengths is generally much easier than convincing them of their weaknesses (Principle 106b). More time is spent discussing weaknesses because the focus is on improvement.

Understand that you and your people will go through a process of personal evolution (Principle 107).

Recognize that your evolution at Bridgewater should be relatively rapid, and your career path is not planned at the outset (Principle 108). The best path is based on discovering likes, dislikes, strengths, and weaknesses iteratively.

Remember that the only purpose of looking at what people did is to learn what they are like (Principle 109).

Look at patterns of behaviors and don't read too much into any one event (Principle 109a).

If someone is doing their job poorly, consider whether this is due to inadequate learning (training/experience) or inadequate ability (Principle 110).

Help people through the pain that comes with exploring their weaknesses (Principle 112).

Recognize that when you are really in synch with people about weaknesses, whether yours or theirs, they are probably true (Principle 113).

Remember that you don’t need to get to the point of “beyond a shadow of a doubt” when judging people (Principle 114); aim for a mutually agreed “by-and-large” understanding.

Training and Testing (Principles 117-127)

Train and test people through experiences (Principle 117).

Understand that training is really guiding the process of personal evolution (Principle 118).

Know that experience creates internalization (Principle 119), which is vastly superior to intellectualized learning.

Remember that everything is a case study (Principle 121).

Teach your people to fish rather than give them fish (Principle 122). Managers should train and test, not micromanage.

Recognize that sometimes it is better to let people make mistakes so that they can learn from them (Principle 123).

Know what types of mistakes are acceptable and unacceptable (Principle 124). The rule is: "I’m willing to let you scratch or dent the car, but I won’t put you in a position where I think there’s a significant risk you could total it".

Recognize that behavior modification typically takes about 18 months of constant reinforcement (Principle 125).

Train people; don't rehabilitate them (Principle 126). Rehabilitation involves changing values or abilities, which is too difficult and improbable to do at Bridgewater.

After you decide "what's true," think carefully about "what to do about it" (Principle 127).

Sorting People (Principles 128-132)

Sort people into other jobs at Bridgewater, or remove them from Bridgewater (Principle 128).

When you find that someone is not a good "click" for a job, get them out of it ASAP (Principle 129). Expecting people to be much better soon is a mistake; slow improvement is the best to expect.

Know that it is much worse to keep someone in a job who is not suited for it than it is to fire someone (Principle 130).

When people are "without a box," consider whether there is an open box at Bridgewater that would be a better fit. If not, fire them (Principle 181).

Do not lower the bar (Principle 132).

Chapter 4: TO PERCEIVE, DIAGNOSE, AND SOLVE PROBLEMS...

This section applies the 5-Step Process (Goals, Problems, Diagnosis, Design, Tasks) to management.

Perceiving Problems (Principles 133-146)

Know how to perceive problems effectively (Principle 133).

Perceiving problems is the first essential step toward great management (Principle 135).

Problems are the fuel for improvement (Principle 136).

You need to be able to perceive if things are above the bar or below the bar (Principle 137).

Don't tolerate badness (Principle 138).

"Taste the soup" (Principle 139): A good manager constantly checks the quality of the "product" against the vision of excellence.

Have as many eyes looking for problems as possible (Principle 140).

To perceive problems, compare how the movie is unfolding relative to your script (Principle 141).

Don't use the anonymous "we" and "they," because that masks personal responsibility (Principle 142); use specific names.

Be very specific about problems; don't start with generalizations (Principle 143).

Tool: Use issues logs, metrics, surveys, checklists, outside consultants, and internal auditors (Principle 144). The issues log acts like a water filter to catch "garbage" for root cause diagnosis.

The most common reason problems aren't perceived is the "frog in the boiling water" problem (Principle 145): getting used to very bad things that would shock fresh eyes.

Fixing unacceptable problems is easier than not fixing them (Principle 146), even if they seem difficult.

Diagnosing Problems (Principles 147-165)

Diagnose to understand what the problems are symptomatic of (Principle 147). Problems are manifestations of root causes in the machine (design and people).

Diagnosis is foundational both to progress and quality relationships (Principle 149).

Ask the following questions when diagnosing (Principle 150), comparing the envisioned "mental map" of how the machine should work to how it actually performed, and identifying the gap.

Remember that a root cause is not an action but a reason (Principle 151), described by using adjectives rather than verbs (e.g., "forgetful" instead of "missed the train").

Identify at which step failure occurred in the 5-Step Process (Principle 152).

Remember that a proper diagnosis requires a quality, collaborative, and honest discussion (Principle 153).

Keep in mind that diagnoses should produce outcomes (Principle 154), such as agreements or theories about root causes.

Don't make too much out of one "dot" (Principle 155)—synthesize a richer picture by collecting many outcomes ("dots") and triangulating with others.

Maintain an emerging synthesis by diagnosing continuously (Principle 156).

To distinguish between a capacity issue and a capability issue, imagine how the person would perform if they had ample capacity (Principle 157).

Avoid "Monday morning quarterbacking" (Principle 159); evaluate past decisions based on what could have been reasonably known at the time.

Identify the principles that were violated (Principle 160).

Remember that if you have the same people doing the same things, you should expect the same results (Principle 161).

Use the following "drilldown" technique to gain an 80/20 understanding of a department... (Principle 162). This process takes about five hours and consists of four steps: 1) listing problems (1-2 hours); 2) diagnosing root causes (2-4 hours); 3) creating a plan (2-3 hours); and 4) implementing (6-12 months).

Putting Things in Perspective (Principles 163-165)

Go back before going forward (Principle 164) by reflecting on how the machine worked and telling "the story" to gain perspective and achieve agreement.

Understand "above the line" and "below the line" thinking (Principle 165). "Above the line" focuses on main points and progresses coherently, while "below the line" focuses on details for their own sake.

Designing the Machine (Principles 166-187)

Remember: You are designing a "machine" or system that will produce outcomes (Principle 167).

Don't act before thinking. Take the time to come up with a game plan (Principle 168).

The organizational design you draw up should minimize problems and maximize capitalization on opportunities (Principle 169).

Put yourself in the "position of pain" for a while so that you gain a richer understanding of what you're designing for (Principle 170).

Recognize that design is an iterative process (Principle 171).

Visualize alternative machines and their outcomes, and then choose (Principle 172).

Think about second- and third-order consequences as well as first-order consequences (Principle 173).

Most importantly, build the organization around goals rather than tasks (Principle 174).

First, come up with the best workflow design, sketch it out in an organizational chart, and specify required qualities, and only after that is done, choose the right people (Principle 174a).
Make departments as self-sufficient as possible (Principle 174c).
The efficiency of an organization decreases and the bureaucracy increases in direct relation to the increase in the number of people and/or the complexity (Principle 174d).

Build your organization from the top down (Principle 175).

Everyone must be overseen by a believable person who has high standards (Principle 175a).
The ratio of senior managers to junior managers and to the number of people who work two levels below should be limited (Principle 175c), generally not more than 1:10, preferably closer to 1:5.
Do not build the organization to fit the people (Principle 175f).

Have the clearest possible delineation of responsibilities and reporting lines (Principle 176).

Constantly think about how to produce leverage (Principle 177).

It is far better to find a few smart people and give them the best technology than to have a greater number of ordinary and less well-equipped people (Principle 177b).

Watch out for "department slip" (Principle 180), when a support department mistakenly determines how the thing they are supporting should be done.

Tool: Maintain a procedures manual (Principle 183).

Tool: Use checklists (Principle 184).

Use "double-do" rather than "double-check" for mission-critical tasks (Principle 184c).

Watch out for "job slip" (Principle 185).

Have good controls so that you are not exposed to the dishonesty of others and trust is never an issue (Principle 187).

Execution (Principle 188-189)

Do what you set out to do (Principle 188).

Push through! (Principle 189).

Chapter 5: TO MAKE DECISIONS EFFECTIVELY...

This section applies logical and expected value thinking to decision-making.

Dealing with Not Knowing (Principles 190-195)

Recognize the power of knowing how to deal with not knowing (Principle 190).

Understand that the ability to deal with not knowing is far more powerful than knowing (Principle 192).

Embrace the power of asking: "What don't I know, and what should I do about it?" (Principle 192a).
Finding the path to success is at least as dependent on coming up with the right questions as coming up with answers (Principle 192b).

Remember that your goal is to find the best answer, not to give the best one you have (Principle 193).

While everyone has the right to have questions and theories, only believable people have the right to have opinions (Principle 194).

Constantly worry about what you are missing (Principle 195).

Triangulate your view. Never make any important decisions without asking at least three believable people (Principle 195b).

Logical and Expected Value Calculations (Principles 196-197)

Make all decisions logically, as expected value calculations (Principle 196).

Considering both the probabilities and the payoffs of the consequences, make sure that the probability of the unacceptable (risk of ruin) is nil (Principle 197).

The cost of a bad decision is equal to or greater than the reward of a good decision (Principle 197a).
Recognize opportunities where there isn't much to lose and a lot to gain (Principle 197b).
Don't bet too much on anything. Make 15 or more good, uncorrelated bets (Principle 197d).

The 80/20 Rule and Prioritization (Principles 198-204)

Remember the 80/20 Rule, and know what the key 20% is (Principle 198).

Distinguish the important things from the unimportant things and deal with the important things first (Principle 199).

Don't be a perfectionist (Principle 199a).
Since 80% of the juice can be gotten with the first 20% of the squeezing, there are relatively few (typically less than five) important things to consider (Principle 199b).

Think about the appropriate time to make a decision (Principle 200) in light of the marginal gains of additional information versus the marginal costs of postponing the decision.

Make sure all the "must do's" are above the bar before you do anything else (Principle 201).

Remember that the best choices are the ones with more pros than cons, not those that don't have any cons (Principle 202).

Watch out for unproductively identifying possibilities without assigning them probabilities (Principle 203).

Understand the concept and use the phrase "by and large" (Principle 204). This prevents discussions from derailing over exceptions when the general statement is true.

Synthesis (Principles 205-210)

Synthesize (Principle 205).

Understand and connect the dots (Principle 206). Diagnosing a few outcomes ("dots") of the same type is usually needed to get at the true root cause.

Understand what an acceptable rate of improvement is, and that it is the level and not the rate of change that matters most (Principle 207).

If your best solution isn’t good enough, think harder or escalate that you can’t produce a solution that is good enough (Principle 208).

Avoid the temptation to compromise on that which is uncompromisable (Principle 209).

Don’t try to please everyone (Principle 210).