Page 94 - Ray Dalio - Principles

painful mistakes and the value of the principles they gave me.
When the next big one comes along in twenty-five years or so,
or who knows when, it will probably come as a surprise and

cause a lot of pain unless those principles are properly
encoded in algorithms put into our computers.

HELPING POLICYMAKERS

Our economic and market principles were very different from
most others, which accounted for our different results. I will
explain these differences in Economic and Investment
Principles and won’t digress into them now.

As former Fed chairman Alan Greenspan put it, “The
models failed at a time when we needed them most . . . JP

Morgan had the American economy accelerating three days
before [the Lehman Brothers’ collapse]—their model failed.
The Fed model failed. The IMF model failed . . . So that left
me asking myself: What happened?” Bill Dudley, president of
the New York Fed, homed in on the problem when he said, “I
think there’s a fundamental problem in terms of how

macroeconomists look at the economic outlook, growth, and
inflation . . . If you look at the big macro models, they don’t
have a financial sector typically in them. They don’t admit the
possibility that the financial sector could essentially melt
down, and therefore the monetary policy impulse could be
completely impaired. So I think the lesson of the crisis is to do
a lot more work to make sure that the finance people are

talking to the macroeconomist people and building models that
are more robust.” He was right. We “finance people” see the
world very differently from the way economists do. As a result
of our success, policymakers reached out to us more, which
led me to have a lot more contact with senior economic
policymakers in the U.S. and around the world. Out of respect

for the privacy of our conversations, I won’t say much about
them except to note that they became much more open to our
nontraditional ways of looking at economies and markets, and
more skeptical about traditional economic thinking, which had
failed to either signal or avert the crisis.