Dalio: Christmas Reflection on the Evolution of Principles and Their Game Theory

Author: Ray Dalio

Translation: Bruce

Merry Christmas to everyone (even if you’re not Christian)!

Yesterday was Christmas Day. While enjoying family time with three generations together, I couldn’t help but reflect on a few points. These reflections focus on: the importance of principles as core assets, the delineation of positive and negative externalities (good and evil), and the concept of “falling into hell” due to the loss of social capital.

1. Principles: The Most Core Intangible Asset

In my view, the most important asset in life is a set of excellent “principles,” because they form the underlying algorithms (Underlying Algorithms) for individual decision-making. Principles shape our utility functions (Utility Function) and their implementation paths. The fundamental principles concern our value hierarchy and even determine our game preferences (i.e., beliefs worth risking life and death for) in extreme situations.

Based on this, I have conducted the following audits and reflections:

• How compatible are our current codes of conduct with Christian and other religious doctrines?
• Do we have a consensus-based contractual principle, or do we fall into “zero-sum games” due to conflicting principles?
• Which universal principles can be shared as public goods (Public Goods) by all humanity?
• Where are the supply sources (Source) of these principles?
• How have these principles evolved through path evolution (Path Evolution) as civilization progresses?

From a historical perspective, since the formation of human societies, civilizations in different regions have developed their own principles and religions within relatively closed environments. Despite geographical differences, the core demand (Demand) across all societies is highly consistent: a set of informal institutions that constrain individual behavior to reduce transaction costs (Transaction Costs) and achieve social coordination. These guidelines are encoded in “scriptures.” In other words, the origin of religion was to provide incentives for social governance, guiding individual behavior toward collective optimality.

Most religions—whether based on transcendental faith or focused on worldly ethics like Confucianism—are hybrid contracts composed of two parts:

1. Social governance guidelines: interaction norms aimed at enhancing overall social welfare;
2. Supernatural assumptions (Superstitions): belief systems beyond logical empiricism.

These supernatural assumptions (such as virgin birth, resurrection) often lack empirical support when interpreted literally. But if viewed as metaphors (Metaphors), they reflect their cross-cultural isomorphism. In comparison, non-supernatural principles related to “social cooperation” in major religions are surprisingly similar. If we only focus on the elaborate formalities and ignore these core motivational principles, religious festivals become meaningless consumption symbols.

Although I do not believe in supernatural powers (I tend not to accept unverified a priori assumptions), I highly agree with the evolutionary wisdom embedded in religion. For example, “Love your neighbor as yourself” and “Karma” actually embody reciprocal altruism in game theory.

From a mechanism design (Mechanism Design) perspective, when individuals adopt a “give more than take” strategy in interactions, it produces extremely high value-added: the cost to the helper is often far less than the marginal benefit to the recipient. The accumulation of these positive externalities creates a non-zero-sum “win-win relationship,” greatly increasing social output and welfare.

For me, “spirituality” refers to individuals recognizing themselves as part of a larger system and striving for system optimization rather than local optimization (i.e., extreme self-interest at the expense of overall benefit). This is not only a moral requirement but also an efficient operational logic. Unfortunately, this consensus on good and evil is currently suffering severe credit erosion in society.

Of course, I do not advocate absolute peace. When it comes to irreconcilable conflicts related to survival, struggle is a necessary external constraint. But my principle is: avoid unnecessary deadweight loss on supernatural assumptions or trivial marginal matters, and never blur the fundamental delineation of positive and negative externalities (good and evil).

2. Delineation of Good and Evil and the Moral Attributes of Human Capital

What exactly are good and evil?

In the modern context, people often mistakenly reduce “good and evil” to “the increase or decrease of personal benefits.” From an economic perspective, “good” is behavior that maximizes social total utility (positive externality), while “evil” is behavior that harms the system’s overall interests (negative externality).

Evaluations of character are an extension of this logic. Good character (Good Character) is a psychological asset capable of committing to and realizing the maximization of collective interests; bad character results from weaknesses or deviations that damage social welfare.

I firmly believe there exists a behavioral pattern that can achieve Pareto improvements (Pareto Improvement) for both individuals and society. Although religious discourses differ, the promotion of qualities like “courage,” “integrity,” and “moderation” is a global consensus because they are necessary protocols for maintaining the operation of complex societies.

3. The Current “Downward Trajectory” of Society

I personally believe we are in a metaphorical “hellish process.” This means that most members of society have lost their anchors for the consensus on good and evil, and this loss of consensus will lead to society paying an extremely high price (Hellacious Price).

More specifically, the social contract consensus is disintegrating. The dominant principles have been reduced to pure self-interest maximization: an absolute plunder of money and power. This drift in values is vividly reflected in cultural products: we lack role models with moral authority.

When malicious behaviors are packaged as shortcuts to success, and children grow up in environments lacking proper “incentive templates,” the consequences are disastrous. Drugs, violence, suicide, and the widening opportunities gap are symptoms of the collapse of social principles and also their causes.

Ironically, many believers in history have betrayed the principles of cooperation in their faiths due to disputes over supernatural explanations or personal interests. This moral hazard (Moral Hazard) has led people to abandon religious superstitions while also mistakenly dismissing beneficial social norms embedded within them, resulting in institutional vacuums.

Summary

Despite technological progress and exponential increases in productivity, I believe technology is merely a lever; it can amplify both benefits and destruction. History has shown that technological innovation has not eliminated conflict.

The good news (The good news) is that, because our existing toolbox of technology is extremely powerful, as long as we can reconstruct a healthy set of principles based on “reciprocal win-win” (Rulebook), we have the capacity to solve all systemic crises.