The Psychology of Money Chapter 2: Luck & Risk

Bill Gates was one in a million kids whose high school had a computer in 1968. He didn’t do anything to get special access to it or to be at the right school at the right time – he was lucky. Of course, he had more than luck, he had hard work. Not all his classmates with the same computer access went on to found a multi-trillion dollar company. In fact, one of his classmates was also one in a million – his name was Kent Evans, and he died in a mountaineering accident before graduating (the probability of that happening was about 0.0001%, or one in one million).

How much of someone’s success or tragedy is due to luck or risk? The exact number may vary, but what’s important is to acknowledge that it’s not 100%, and it’s not 0%. Whether drastic examples like the ones above, or small wins and failures we experience everyday, nothing is solely a result of our efforts. Housel uses the stories above to show that “luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.”

One problem with luck and risk in our financial lives is that our society looks at those who are “successful” (usually defined by net worth, income, etc.) in an attempt to copy their actions and produce the same results. Unfortunately, this often fails to consider that all of these to various degrees, and often the most extreme to higher degrees, is a result of luck.

The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side. The dangerous part of this is that we’re all trying to learn about what works and what doesn’t work with money. (Page 31)

Vanderbuilt and Rockefeller were known for flouting the law, but so was Enron. We use all as examples (the former to emulate, the latter to avoid), though they shared this common trait. Was it that the first two got lucky and the third did not? Should this be an endorsement to flout the law, or to stay within its bounds?

So how can we use others’ success as an example? Housel’s advice is to look for patterns – if 90 out of 100 successful people all share a common trait, it might be safe to assume that this is a good habit to form. Of course it’s not foolproof that you’ll end up with the same results. Even if it’s a 90% success rate, 10% will have done everything right and still end up failing.

In the remaining chapters, we’ll explore these patterns and what behaviors we should emulate (or avoid) for success in our finances.

Until next time, happy reading!