19 Nov Ray Dalio and First Order Thinking
Along with Warren Buffett, Ray Dalio is one of the most successful investors out there. He founded Bridgewater Associates, an investment management firm, out of his New York apartment, in 1975; today it’s worth over 160 billion in assets. He predicted the 2008 financial crisis and, like Buffett, is known as much for his philosophical approach to business and life as he is for the almost preternatural understanding of the markets.
The brunt of that philosophy was collected in a 123-page self-published volume titled, modestly, Principles, and has since been expanded into a handsome hardcover edition that has already achieved massive acclaim since being published in 2017.
One thing I like about Principles is the way it’s as much a guide to life as it is a primer for being a successful businessperson and investor. One principle in particular caught my eye this week.
According to Dalio, “people who overweigh the first-order consequences of their decisions and ignore the effects that the second- and subsequent-order consequences will have on their goals rarely reach their goals.”
First order consequences are, of course, the immediate effects generated by a decision or action, while second or third (or more) order consequences tend to manifest a bit further down the road. As Dalio puts it:
For example, the first-order consequences of exercise (pain and time-sink) are commonly considered undesirable, while the second-order consequences (better health and more attractive appearance) are desirable. Similarly, food that tastes good is often bad for you and vice versa.
When it comes to financial planning, we sometimes focus so much on first order goals and forget to think a bit further down the road. Which is understandable: items in the first order category are more immediate and tend to require action now, not later. The problem is that, according to Dalio, “Quite often the first-order consequences are the temptations that cost us what we really want, and sometimes they are barriers that stand in our way of getting what we want.”
In other words, figuring out what you want, beyond immediate first order consequences, can be a powerful first step in building a relationship with money that fosters a more fulfilling life. Moreover, thinking beyond first order consequences will help you identify unintended costs associated with the decisions you make, as well as any barriers preventing you from achieving prosperity. Whether that’s eschewing your morning latte and putting that money in a jar you crack open at the end of the month for something you really want or walking past that electronics store instead of checking out the latest iPhone model, learning to resist impulsive, first order thinking lets you practice longterm thinking (and gets you where you want to be, financially, faster).