Research: Principle and Model Thinking
Systemizing Decision Making
I just completed part 1 of the book Principles by Ray Dalio, and here is a summary of what I find useful.
Learn
It is important to learn from the smartest, to know when to not have an opinion, to gather lessons from your failure to increase the chances of your success, develop and systemize principles/models and balance risks to enjoy upside and minimize downside.
One thing for me in this phase is that, there are a lot of smart people out there who have developed a lot of tools and shared quite a number of information and resources, and all you need to do is learn from them and build a system coupled with your personal learning and observations.
Systemize
For every event there are two spectrum of factors that result in an event which are the Cause and Effect factor. It is important to understand the Cause and the Effect to be able to learn from them, build decision rules/principles that could be your personal model.
Here is how I internalize this, especially in the markets. Things happen or price has moved the question I am asking myself is what caused this event to occur the way it did, then I am able to outline series of factors that could have caused the effect of price movement, then from the list I can formulate a pseudocode based on if-else statements that serves as some form of Algorithmic Theory and I can utilize that as a model for making decisions.
What Happened → Why Did it Happen (List all factors and component you can identify) → Then build a model of how the factors interplayed to result in what happened ( the effect)
To drill on the above further as it relates to the markets:
Understand the factors that drive them (Macro to Micro)
Timing is also important ( it gives a constricted space for these things to occur)
Build models to know how to react to the information available at each point in time
Test with historical data or dive in and make adjustments as you go
Trading/Investing and Bets
The only way to replicate your result consistently is to replicate the same set of actions that yielded the result, as such from Systemizing, you should reflect on how well the criteria work, and try to convert them to formulas/algo and test how well they work in the past through historical data and the purpose of this is to be able to modify the criteria (algorithm) if required.
When backtesting your criteria it is quite easy to do that. The hard work is been able to implement them in the present -the hard right edge of the curve, and this is where thinking in bets becomes useful. The fact is you are not always going to be right, you would lose once in a while and that’s because there is always risk, and as such its important to think in bets and a mix of probability.
From your bets and continuous refining of your model, you should be able to balance the risks to enjoy the upside while also minimizing your downside.
This aspect of principle is essentially the pinnacle of the investment management and decisions of Bridgewater Associates, however, you might not have the sophisticated tools, but tools like Excel, Python and Pinescript for TradingView users could be useful.
Moreover, I also gleaned some insights from
as it relates to principle thinking:The key is the principles and how you are systemizing things.