Page 230 - Ray Dalio - Principles

5.5 Logic, reason, and common sense

are your best tools for

synthesizing reality and

understanding what to do about

it.

Be wary of relying on anything else. Unfortunately, numerous
tests by psychologists show that the majority of people follow
the lower-level path most of the time, which leads to inferior

decisions without their realizing it. As Carl Jung put it, “Until
you make the unconscious conscious, it will direct your life
and you will call it fate.” It’s even more important that
decision making be evidence-based and logical when groups
of people are working together. If it’s not, the process will
inevitably be dominated by the most powerful rather than the
most insightful participants, which is not only unfair but

suboptimal. Successful organizations have cultures in which
evidence-based decision making is the norm rather than the
exception.

5.6 Make your decisions as expected

value calculations.

Think of every decision as a bet with a probability and a
reward for being right and a probability and a penalty for

being wrong. Normally a winning decision is one with a
positive expected value, meaning that the reward times its
probability of occurring is greater than the penalty times its
probability of occurring, with the best decision being the one
with the highest expected value.

Let’s say the reward for being right is $100 and its

probability is 60 percent, while the penalty for being wrong is
also $100. If you multiply the reward by the probability of
being right you get $60 and if you multiply the penalty by the
probability of being wrong (40 percent) you get $40. If you
subtract the penalty from the reward, the difference is the