Ray Dalio Applies Lessons From the Past to Today’s Financial World

The great Harvard economist John Kenneth Galbraith once wrote that “there can be few fields of human endeavour in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.” 

Billionaire founder of the world’s largest hedge fund, Ray Dalio has taken it upon himself to break that mold by championing the use of history in the financial world. In his bestselling book, Principles: Life and Work, published last year, Dalio writes that “with time and experience, I came to see each encounter [with a financial puzzle] as ‘another one of those’ that I could approach more calmly and analytically, like a biologist might approach an encounter with a threatening creature in the jungle: first identifying its species and then, drawing on his prior knowledge about its expected behaviors, reacting appropriately.” Realizing that life is filled with both the familiar and the unfamiliar, Dalio adds that “when I ran into ones I hadn’t seen before, I would be painfully surprised. Studying all those painful first-time encounters, I learned that even if they hadn’t happened to me, most of them had happened to other people in other times and places, which gave me a healthy respect for history...”

In February, Dalio visited the Belfer Center to explore his use of history with scholars in the Center’s Applied History Project’s Faculty Working Group. Most meetings of the Applied History Working Group focus on how policymakers in government can illuminate current policy challenges and choices by analyzing historical precedents and analogues. The Dalio brainstorm session expanded the Harvard team’s outlook by exploring the ways in which financial analysts in the private sector can apply insights from market history to add value to investment strategy. 

Dalio has written a series of Applied History-style reports including “Populism: The Phenomenon,” (which identifies similarities and differences between 14 historical populist leaders in 10 different countries to formulate an “archetypical populist template”) and “Economic Principles” (which includes data and analysis on deleveraging cycles in 1920s and 1930s America and Europe, as well as charts on rise and decline of world economies over the past 500 years.) 

Unlike most financial analysts, however, Dalio does not simply crunch numbers. He also employs unique qualitative methods to learn from the past. For example, rather than reading standard works of history, Dalio reads newspapers from past periods of economic distress to shed light on the uncertain market conditions of today. By applying lessons from financial history, particularly from debt-ridden eras, Dalio was one of the only analysts who anticipated the 2007-2008 financial crisis—allowing Bridgewater to deliver positive returns while other firms hemorrhaged money during the depths of the crisis.

As the Applied History Project’s Co-Director Graham Allison puts it, “Ray is a phenomenon. His gospel of ‘radical transparency,’ as well as his skill in finding patterns in the past persuaded me to re-read his book. And I’m still thinking.” 

Dalio’s productive exchange of ideas with scholars in the Applied History Working Group was a testament to the fact that history’s value stretches not only from the offices of Ivory Tower to Foggy Bottom, but also to the C-suites of Wall Street.

About the Applied History Project 

Applied history is the explicit attempt to illuminate current challenges and choices by analyzing historical precedents and analogues. The Center’s Applied History Project seeks to institutionalize historical analysis in the tradition of two great Harvard Kennedy School professors—the late Ernest May and Richard Neustadt—to create in universities beginning with Harvard a new and rigorous sub-discipline of Applied History. Applied historians take current predicaments and identify precedents and analogues that offer clues about what is likely to happen, suggest possible policy interventions, and assess probable consequences. 

For more about the Applied History Project, visit belfercenter.org/AppliedHistory.