Ray Dalio’s Richest and Strangest Hedge Fund

In this month’s New Yorker, John Cassidy profiles Ray Dalio, the founder of Bridgewater Associates, said by some to be the strangest hedge fund in the world.

I found the piece interesting, though I did think Cassidy could have done a better job explaining the nuances of Dalio’s behavior, such as evidenced in this paragraph:

Dalio asked for another opinion. From the back of the room, a young man dressed in a black sweatshirt started saying that a Chinese slowdown could have a big effect on global supply and demand. Dalio cut him off: “Are you going to answer me knowledgeably or are you going to give me a guess?” The young man, whom I will call Jack, said he would hazard an educated guess. “Don’t do that,” Dalio said. He went on, “You have a tendency to do this. . . . We’ve talked about this before.” After an awkward silence, Jack tried to defend himself, saying that he thought he had been asked to give his views. Dalio didn’t let up. Eventually, the young employee said that he would go away and do some careful calculations.

Do you believe the world is mechanical? Do parts come together to work as a seamless whole? Ray Dalio thinks so:

Many hedge-fund managers stay pinned to their computer screens day and night monitoring movements in the markets. Dalio is different. He spends most of his time trying to figure out how economic and financial events fit together in a coherent framework. “Almost everything is like a machine,” he told me one day when he was rambling on, as he often does. “Nature is a machine. The family is a machine. The life cycle is like a machine.” His constant goal, he said, was to understand how the economic machine works. “And then everything else I basically view as just a case at hand. So how does the machine work that you have a financial crisis? How does deleveraging work—what is the nature of that machine? And what is human nature, and how do you raise a community of people to run a business?”

So who invests in Bridgewater Associates, exactly? Not wealthy invididuals:

Part of Dalio’s innovation has been to build a hedge fund that caters principally to institutional investors rather than to rich individuals. Of the roughly one hundred billion dollars invested in Bridgewater, only a small proportion comes from wealthy families. Almost a third comes from public pension funds, such as the Pennsylvania Public School Employees’ Retirement System; another third comes from corporate pension funds, such as those at Kodak and General Motors; a quarter comes from government-run sovereign wealth funds, such as the Government Investment Corporation of Singapore.

A surprise about Bridgewater’s investing tendencies (no U.S. markets?):

Is Bridgewater really any different? Although the firm trades in more than a hundred markets, it is widely believed that the great bulk of its profit comes from two areas in which Dalio is an expert: the bond and currency markets of major industrial countries. Unlike some other hedge funds, Bridgewater has never made much money in the U.S. stock market, an area where Dalio has less experience.

While the piece makes it sound like working at Bridgewater is quite the challenge, I appreciated this nugget:

Dalio insists that money has never been his main motivation. He lives well, but avoids the conspicuous consumption that some of his rivals indulge in. He and his wife, Barbara, to whom he has been married for thirty-four years, own two houses, one in Greenwich, Connecticut, and one in Greenwich Village, which he sometimes uses on weekends. (They are currently building a new house on the water in Connecticut.) Apart from hunting and exploring remote areas, Dalio’s main hobby is music: jazz, blues, and rock and roll. Recently, he joined a philanthropic campaign started by Bill Gates and Warren Buffett, pledging to give away at least half of his money.

Ray Dalio is a man I’d like to meet. We could talk about books and music and photography. And oh yes, the financial markets (I do have a degree in quantitative finance, after all, and work in the financial sector).

On Winning

The notion of winning, as presented in this Newsweek piece:

Defined that way, winning becomes translatable into areas beyond the physical: chess, spelling bees, the corporate world, even combat. You can’t go forever down that road, of course. The breadth of our colloquial definition for winning—the fact that we use the same word for being handed an Oscar as for successfully prosecuting a war—means that there is no single gene for victory across all fields, no cerebral on-off switch that turns also-rans into champions. But neuroscientists, psychologists, and other researchers are beginning to better understand the highly interdisciplinary concept of winning, finding surprising links between brain chemistry, social theory, and even economics, which together give new insight into why some people come out on top again and again.

 I am not sure I agree with this, however. I would think it depends on one’s personality (do you have more or less empathy than the average individual?):

What’s better than winning? Doing it while someone else loses. An economist at the University of Bonn has shown that test subjects who receive a given reward for a task enjoy it significantly more if other subjects fail or do worse—a finding that upends traditional economic theories that absolute reward is a person’s central motivation. It’s one of several new inroads into the social dynamics of winning yielded by neuroeconomics, a trendy new field that mixes elements of neuroscience, economics, and cognitive psychology to determine why people make the choices they do—even, or especially, the irrational ones.

Also, the case study revolving around Agassi in the piece is interesting… Why do Americans love a winner? The last sentence provides the stimulating answer.

Thomas Jefferson on Patents

In a letter to Isaac McPherson, Thomas Jefferson writes (emphasis mine):

If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.

That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density in any point, and like the air in which we breathe, move, and have our physical being, incapable of confinement or exclusive appropriation. Inventions then cannot, in nature, be a subject of property.

Society may give an exclusive right to the profits arising from them, as an encouragement to men to pursue ideas which may produce utility, but this may or may not be done, according to the will and convenience of the society, without claim or complaint from anybody. Accordingly, it is a fact, as far as I am informed, that England was, until we copied her, the only country on earth which ever, by a general law, gave a legal right to the exclusive use of an idea. In some other countries it is sometimes done, in a great case, and by a special and personal act, but, generally speaking, other nations have thought that these monopolies produce more embarrassment than advantage to society; and it may be observed that the nations which refuse monopolies of invention, are as fruitful as England in new and useful devices.

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Via Chris Dixon.

Readings: Facebook MD, Trading, Rainbow Toad, Tweeting Birds, Dominion of Melchizedek

What I’ve read online today:

(1) “How Facebook Saved My Son’s Life” [Slate] – amazing story of how Facebook friends of one mother, Deborah Kogan, recognized symptoms of the rare Kawasaki disease in her young son, all while doctors missed the initial diagnosis…

(2) “How Hard Is It To Become the Michael Jordan of Trading?” [The Big Picture] – if you’ve ever wondered the statistics on what it takes to become a professional athlete, this post provides some numbers:

The talent pool gets much more competitive at the college level. The NCAA estimates approximately 3% of HS basketball players, and 6% of HS football and baseball players make an NCAA team.

If those number look daunting, the cut is far more challenging at the professional level. In basketball, only 1.2% of NCAA senior players get drafted by an NBA team. NFL drafts 1.7% of NCAA senior football players; Baseball holds the best odds, where 8.9% of NCAA baseball players will get drafted by a Major League Baseball club — but that includes minor league farm teams.

There’s a handy chart at the bottom of the post which summarizes the statistics. Now, what does it take to become an all-star trader?

(3) “After 8 Decades, Tiny Toad Resurfaces in Asia” [New York Times] – very cool discovery of the Borneo rainbow toad (click through to see the picture):

The Borneo rainbow toad, with its long spindly legs, looks a bit like an Abstract Expressionist canvas splattered in bright green, purple and red. But when this amphibian was last seen, in 1924, the painter Jackson Pollock was just 12, and the only image of the mysterious creature was a black-and-white sketch.

(4) “First Evidence that Birds Tweet Using Grammar” [New Scientist] – fascinating evidence suggests that birds tweet using proper grammar

First, they played finches unfamiliar songs repeatedly until the birds got used to them and stopped overreacting. Then they jumbled up syllables within each song and replayed these versions to the birds.

“What we found was unexpected…” The birds reacted to only one of the four jumbled versions, called SEQ2, as if they noticed it violated some rule of grammar, whereas the other three remixes didn’t. Almost 90 per cent of the birds tested responded in this way. “This indicates the existence of a specific rule in the sequential orderings of syllables in their songs, shared within the social community.”

(5) “The Strange Tale of Alleged Fraudster Pearlasia Gamboa” [San Francisco Weekly] – probably the most bizarre story I’ve read all week. It’s about the Dominion of Melchizedek, which, according to Wikipedia, is a micronation known for facilitating large scale banking fraud in many parts of the world. The SF Weekly story profiles its president, Pearlasia Gamboa, and her confessions.

The Dominion [of Melchizedek] eventually expanded beyond its underwater seat of government to claim more land: three more tiny Pacific islands and portions of Antarctica. After annexing its polar territory, the Dominion began listing among its senior officials a figure with the surname “Penguini,” a touch that a veteran California fraud investigator describes as “cute.”

What was the point of such a lovingly detailed fiction? The Dominion of Melchizedek, according to government authorities, was intended to act as a sort of mothership for con artists worldwide, issuing fake banking licenses, passports, and other documents to lend a veneer of official authenticity to fraud schemes. “Everything about it is phony,” says John Shockey, former head of the fraud unit for the U.S. Comptroller of the Currency.

A fascinating read.

Bill James on Crime

Over at Grantland: a fascinating interview with Bill James, the father of sabermetrics, about…crime. Who knew that James’s passion in life is not actually baseball, but the mechanics of crime?

As a society, do we overestimate or underestimate the importance of crime in day-to-day life?

We underestimate it, because it’s our intent to underestimate it. We only deal with it indirectly. We all do so many things to avoid being the victims of crime that we no longer see those things, so we don’t see the cost of it. Just finding a safe place for us to have this conversation, for example — we needed a quiet place, but before that, we needed to find a safe place. A hotel lobby is what it is because of the level of security. I’ve checked out of this hotel, but I’m still sitting here in the third-floor lobby, because it’s safe. When you buy something, it’s wrapped in seven layers of packaging in order to make it harder to steal.

Another interesting exchange between James and the interviewer, Chuck Klosterman:

But is there some unifying element among the type of people who become murderers? What is the fundamental difference between the kind of person who kills someone and the kind of person who never could?

That’s an interesting question. In a lot of true crime stories, you will see that someone testifies for the defendant and talks about what a good person they are, and that this person could never commit the crime in question. I would like to think of myself as someone who would never commit a crime. I’m sure a lot of people would. But I don’t think that’s a good argument for anything. If I was on a jury, the claim that the accused was “too good a person” to commit the crime would not be an argument I would buy. Rabbis commit crimes. Ministers. Priests commit terrible crimes. Now, are they committing these crimes because they’re not really good people and they’re just pretending to be good, or are they truly good people who simply fail to deal with certain situations? I think the latter is more often the case.

But this is the most fascinating nugget from Bill James:

We continually become less tolerant of actions that lead to death. The human race has been in a long struggle to eliminate murder. And we will succeed…There will always be occasional exceptions, but we’re involved in a long struggle against murder, war, famine, disease — and we move forward more than we move back. 

I think that Bill James and David Eagleman need to have a talk. What about you?

The Stanford Prison Experiment, 40 Years Later

No course in introductory psychology is complete without learning about the infamous Stanford prison experiment. Conducted in August 1971, the study was led by psychology professor Philip Zimbardo. Wikipedia provides a good summary:

Twenty-four students were selected out of 75 to play the prisoners and live in a mock prison in the basement of the Stanford psychology building. Roles were assigned randomly. The participants adapted to their roles well beyond what even Zimbardo himself expected, leading the “Officers” to display authoritarian measures and ultimately to subject some of the prisoners to torture. In turn, many of the prisoners developed passive attitudes and accepted physical abuse, and, at the request of the guards, readily inflicted punishment on other prisoners who attempted to stop it. The experiment even affected Zimbardo himself, who, in his capacity as “Prison Superintendent,” lost sight of his role as psychologist and permitted the abuse to continue as though it were a real prison.

Now, almost forty years later after the social experiment, Stanford Magazine interviewed some of the participants of the study. It’s a really fascinating read, and to get this first-person perspective is eye-opening.

Zimbardo’s explanation of how he was affected:

There was zero time for reflection. We had to feed the prisoners three meals a day, deal with the prisoner breakdowns, deal with their parents, run a parole board. By the third day I was sleeping in my office. I had become the superintendent of the Stanford county jail. That was who I was: I’m not the researcher at all. Even my posture changes—when I walk through the prison yard, I’m walking with my hands behind my back, which I never in my life do, the way generals walk when they’re inspecting troops.

The Stanford prison experiment lasted for only six days. Instrumental in convincing Zimbardo that the experiment was inhumane and should be stopped was Christina Maslach, who received her doctorate around the time.

Phil came after me and said, “What’s the matter with you?” That’s when I had this feeling like, “I don’t know you. How can you not see this?” It felt like we were standing on two different cliffs across a chasm. If we had not been dating before then, if he were just another faculty member and this happened, I might have said, “I’m sorry, I’m out of here” and just left. But because this was someone I was growing to like a lot, I thought that I had to figure this out. So I kept at it. I fought back, and ended up having a huge argument with him. I don’t think we’ve ever had an argument quite like that since then.

Zimbardo and Maslach would later marry, in 1972.

A confession from one of the guards, Dave Eshelman. I would be willing to bet that some of the prisoners suffered “lasting damage”:

The fact that I ramped up the intimidation and the mental abuse without any real sense as to whether I was hurting anybody— I definitely regret that. But in the long run, no one suffered any lasting damage. When the Abu Ghraib scandal broke, my first reaction was, this is so familiar to me. I knew exactly what was going on. I could picture myself in the middle of that and watching it spin out of control. When you have little or no supervision as to what you’re doing, and no one steps in and says, “Hey, you can’t do this”—things just keep escalating. You think, how can we top what we did yesterday? How do we do something even more outrageous? I felt a deep sense of familiarity with that whole situation.

In the piece, one of the prisoners, Richard Yacco, provides some context about the study:

One thing that I thought was interesting about the experiment was whether, if you believe society has assigned you a role, do you then assume the characteristics of that role? I teach at an inner city high school in Oakland. These kids don’t have to go through experiments to witness horrible things. But what frustrates my colleagues and me is that we are creating great opportunities for these kids, we offer great support for them, why are they not taking advantage of it? Why are they dropping out of school? Why are they coming to school unprepared? I think a big reason is what the prison study shows—they fall into the role their society has made for them.

Read the whole thing. I only wish they were able to track down one or two more prisoners from the study. I understand that most of them would rather not talk about it today, however.

Richard Feynman, Superstar Scientist

Richard Feynman is my favourite scientist.

But this wasn’t the case until I ended up going to graduate school at California Institute of Technology. While studying at Caltech, I often came to the school’s bookstore and read for about an hour or so every morning. They had a huge section devoted to Richard Feynman (after all, Feynman taught at Caltech for most of his career). Over a span of a few months, I ended up reading several books by Richard Feynman. My favourite is probably What Do You Care What Other People Think?. Reading Feynman’s books, I began to appreciate that this wasn’t an ordinary scientist. He wanted to make a connection to everything he did, he wanted to understand how the world worked, and most importantly, he cared about the world he lived in and the people he met.

In the latest issue of The New York Review of Books, Freeman Dyson reviews two new books about Richard Feynman: Feynman (to be released in August 2011) by Jim Ottaviani and Quantum Man: Richard Feynman’s Life in Science by Lawrence M. Krauss. I haven’t read either of those books, while they do look compelling.

The overall summary provided by Dyson is excellent, even if I already knew much about Feynman’s history, and, for me, there wasn’t much new in the article. However, something that did stand out was this notion of “superstar scientist”:

Two new books now raise the question of whether Richard Feynman is rising to the status of superstar. The two books are very different in style and in substance. Lawrence Krauss’s book, Quantum Man, is a narrative of Feynman’s life as a scientist, skipping lightly over the personal adventures that have been emphasized in earlier biographies. Krauss succeeds in explaining in nontechnical language the essential core of Feynman’s thinking. Unlike any previous biographer, he takes the reader inside Feynman’s head and reconstructs the picture of nature as Feynman saw it. This is a new kind of scientific history, and Krauss is well qualified to write it, being an expert physicist and a gifted writer of scientific books for the general public.Quantum Man shows us the side of Feynman’s personality that was least visible to most of his admirers, the silent and persistent calculator working intensely through long days and nights to figure out how nature works.

If you had asked me to name superstar scientists in high school: Einstein, Millikan, Newton, M. Curie, and Bohr would have made the list. We didn’t learn about Feynman, unfortunately. But if you ask me today, then without hesitation, Feynman would be on my list of superstar scientists.

The entire summary is worth reading if you aren’t familiar with Feynman’s life. Absolutely have to agree with this, even if Feynman downplayed his exposure in his books (he served on the commission which sought to investigate the 1986 Space Shuttle Challenger disaster):

Feynman’s dramatic exposure of NASA incompetence and his O-ring demonstrations made him a hero to the general public. The event was the beginning of his rise to the status of superstar. Before his service on theChallenger commission, he was widely admired by knowledgeable people as a scientist and a colorful character. Afterward, he was admired by a much wider public, as a crusader for honesty and plain speaking in government. Anyone fighting secrecy and corruption in any part of the government could look to Feynman as a leader

This last tidbit was new to me and is some wonderful advice:

He [Richard Feynman] never showed the slightest resentment when I published some of his ideas before he did. He told me that he avoided disputes about priority in science by following a simple rule: “Always give the bastards more credit than they deserve.”