Is the Future of Decision-making All About Computer Algorithms?

Ray Dalio is one of the biggest names on Wall Street. The billionaire founder of Bridgewater Associates, the world’s largest hedge fund, is outspoken and unafraid to take on his opponents.

That’s especially true when he feels wronged by the media. Which was the case last week after a Wall Street Journal story: "The World’s Largest Hedge Fund is Building an Algorithmic Model from its Employees’ Brains."

Dalio says the WSJ mischaracterized his firm’s investment and decision-making processes. His objections largely surround the claim that engineers at his hedge fund were creating complex software that would essentially "automate most of the firm’s management."

Here are the two key paragraphs from the article that not only seemed to have rankled Dalio, but that also offer an interesting vision for the future of decision-making tools in organizations.

At Bridgewater, most meetings are recorded, employees are expected to criticize one another continually, people are subject to frequent probes of their weaknesses, and personal performance is assessed on a host of data points, all under Mr. Dalio’s gaze.

Bridgewater’s new technology would enshrine his unorthodox management approach in a software system. It could dole out GPS-style directions for how staff members should spend every aspect of their days, down to whether an employee should make a particular phone call.

This kind of decision-making process is extremely interesting. And it’s one we should delve into a bit further.

Before we get into the processes at Bridgewater … and the implications such widespread application of this "white-collar automation" process would mean …

Let’s take a closer look at Mr. Dalio’s response to the WSJ article. Because it is very revealing …

After Dalio read the piece, he criticized it as a version of "fake news." He did so first on a post at LinkedIn, and then in an interview with Henry Blodgett of Business Insider, where he went into more detail on the issue.

His main argument is that the story presented a distorted picture of his firm’s culture.

Here’s how he defended the firm’s decision-making process to Blodgett and Business Insider:

We have a process of what we call "believability weighting" votes. I won’t go through it at length, but each person assesses each other person’s credibility on different dimensions, because people are strong and weak in different things. …

It’s very upfront. It’s very data-based as to why people have different strengths and weaknesses and what their rankings are.

Dalio went further, saying that this process works eminently well for his firm. (Bridgewater manages $160 billion for about 350 global clients — and its success can’t be denied.)

But he also says that his process could work for the rest of the world as a tool for enhanced decision-making.

The infographic below, published in Business Insider, details some of the components of that process. It’s extremely interesting in terms of the transparency, honesty and the use of technology.

Source: Business Insider

Recording everything … following principles … and embracing brutal honesty, employee scorecards and Apple (AAPL) iOS apps to track it all does seem like a very aggressive way to make decisions.

Yet while this process may seem harsh, intense and uncomfortable for those who participate …

It also seems like a process where decisions would be subjected to brutal vetting of the sort where only the strongest survive.

So, if those ideas can stand up to the intense scrutiny, then the organization as a whole would be the real beneficiaries.

Now, I don’t think this kind of process would be right for every organization. However, more transparency, more honesty, a sound set of principles and even a little pain is something that all ideas should be subjected to.

You see, it is only through being subjected to the most-intense fire that the strongest swords are made.

The same can be said for the best ideas.

***

What’s your opinion of the Dalio/Bridgewater Associates decision-making process? Is he right about "fake news"? Does your company, or a company or organization you’ve worked for, have a similar process? If you’d like to weigh in on this issue, or on any of the issues we cover in the Afternoon Edition, leave a comment on our website or send me an e-mail.

***

It’s the iPhone’s 10th birthday today, and the Nasdaq notched another record high today to celebrate. Apple (AAPL) gained 1% on its smartphone’s big day, while the Nasdaq gained 0.2% to end at 5,531.82.

• A ‘dog day’ on the Nadsaq: Petcare company VCA Inc. (WOOF) popped 28.3% on news that Mars Inc. will buy it for $9.1 billion.

• Tired of those two-year wireless contracts? So is your carrier. This week, Verizon (VZ) joined T-Mobile (TMUS), AT&T (T) and Sprint (S) in parting with early contract termination fees. It will also be selling phones at full retail price and boosting its equipment-upgrade fee. But the move didn’t pay off right away, as VZ slid 1% today.

• Oil fell 3.7% to a three-week low. WTI crude slid to $51.96 on a barrel of bearish news. The U.S. rig count rose for the 10th-straight week. And Iraq reported record exports in December, but pledged to make its promised production cuts starting this month. Plus Iran, which is exempt from the OPEC deal, sold 13 million barrels that had been held on tankers at sea.

• Did you welcome a child or grandchild in 2015? It will cost $233,610 to raise them. New Department of Agriculture data says that’s what a middle-income married couple with two children, living in a mid-priced area like the urban West, will spend. Those in a rural area may spend about 11K/year while some higher-income urban households may pay about $20K/year thanks to increased housing and education costs. And that’s without factoring in college! Costs "only" rose 3% year-over-year — the average since 1960 is 4.3%.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “Is the Future of Decision-making All About Computer Algorithms?”

  1. The statement, “You see, it is only through being subjected to the most-intense fire that the strongest swords are made”, is simply incorrect. Subject a sword to the most intense fire, and all you get is a puddle of hot metal. I suspect if you subject subject any idea to enough scrutiny, it will be rejected, as nothing is perfect, and you will end up with no ideas at all, and will eventually destroy the institution applying this concept.

  2. This is very interesting and I can see good and bad aspects of it. In the sense that it encourages openness and conflict resolution before it becomes an issue I think it is good. On the other hand, I know human nature, I can see the strong potential for individuals to keep their thoughts to themselves.

    If one is objectively criticizing it can be good. I had a boss who always asked hard questions about my proposals. It was tough at first but very beneficial to me and to the organization. It greatly improved my preparation and my sales skills. On the other hand, I have seen “objective” criticism be anything but that. I have also seen objective criticism keep people from venturing very far from the safety of what they know,

    The part about talking behind one’s back is interesting. What exactly constitutes talking behind someone’s back? People have always needed the ability to vent. If they are not able to do so, there is the potential for feelings to remain bottled up until they explode.

    Not everyone is able to be express themselves openly at all times. Some people need time to ferment their thoughts, consider their point of view, etc. Sometimes the only way to do this is to talk off the record or behind closed doors. I wonder what the human cost of this sort of atmosphere will be?

    Speaking of human cost, how long has this been in effect? Certainly their results suggest they are doing something well. I would be interested in seeing their results before and after this was implemented. As Mr. Hoppmann pointed out, this is not for every organization. In particular, it will take an above average manager to properly handle conflicts that are brought to his or her attention at all times. I have been in management, sales, and on the lowest rungs and have seen many managers. Sadly, not all, or perhaps not even most, can handle such discussions properly at any time, especially when they are personal in nature.

    Also, HAVE THERE BEEN ANY CRITICAL EVENTS THAT THIS PROCESS HAD TO DEAL With? Will this process work when things are collapsing quickly, or when conditions are rapidly changing?

    Finally, and perhaps most importantly, we are becoming more and more data driven. It is likely correct to say that we are excessively data driven. While there are many discussions about the social costs of this, from a business and investment point of view, there are great risks to this approach. Data is important and can be good. Too much focus on data is bad (think paralysis by analysis). It can be bad for several reasons. Too much can slow down the decision making process. Too much reliance on it can miss the intangibles that may be quite important or even critical. Too much reliance on it can cause one to miss opportunities because the matrix says it’s not worth pursuing. I think we are turning away from human intuition and it is costing us. This is particularly true in the intelligence community.

    The end result is that it seems to be an inexorable march towards big data, big brother, big risks and it will be quite interesting to see what happens over the next several years.

  3. $233,610 to what age? Makes a big difference, if college is included or not, or other formal training.

  4. I would not work at a place with these requirements. I work very hard for my employer and saved them over 1.5 million the first 10 years I was here as well as brought in the latest and greatest and most reliable technology. But I would never put up with the crap that these Bridgewater employees do.

Comments are closed.