Main Argument 2: Luck & Risk
A central and humbling argument in “The Psychology of Money” is that luck and risk are siblings, two sides of the same powerful, uncontrollable coin that governs all financial outcomes. This principle challenges the deeply ingrained narrative that success is purely a product of hard work, intelligence, and sound decision-making. Housel argues that while these traits are important, every outcome in life is also guided by forces other than individual effort. Luck and risk are the reality that the world is far too complex, with billions of people and infinite moving parts, to allow 100% of your actions to dictate 100% of your outcomes. Recognizing this is not an excuse for laziness or a surrender to fatalism; instead, it is a crucial ingredient for developing the humility, resilience, and wisdom required for long-term financial success. The core message of this argument is best summarized by a phrase from NYU professor Scott Galloway, which Housel champions: “Nothing is as good or as bad as it seems.”
To truly unpack this concept, we must move beyond a simple acknowledgment that “luck exists” and delve into the profound and often uncomfortable implications it has for how we judge ourselves, how we judge others, and from whom we choose to learn. Housel uses the powerful and contrasting stories of Bill Gates and his high school friend Kent Evans to illustrate that luck and risk are not minor variables; they are forces of the same magnitude, capable of creating wildly divergent destinies from the same starting ingredients of talent and ambition.
1. The One-in-a-Million Forces: The Case of Gates and Evans
The story of Bill Gates’s success is legendary. He is celebrated for his staggering intelligence, his relentless work ethic, and his visionary foresight into the future of personal computing. These qualities are undeniably true and were essential to his success. However, Housel argues that to attribute all of Microsoft’s success to these personal traits is to miss a key, and perhaps the most crucial, part of the story: the element of pure, unadulterated luck.
In 1968, Bill Gates attended Lakeside School, an elite private school near Seattle. Through a series of fortunate events—a forward-thinking teacher, a resourceful Mothers’ Club, and a successful rummage sale—Lakeside became one of the only high schools in the entire world to possess a computer terminal. Not just any computer, but a Teletype Model 30 connected to a General Electric mainframe that allowed for time-sharing, a cutting-edge technology at the time. This gave a 13-year-old Bill Gates and his classmate Paul Allen effectively unlimited, hands-on access to a level of computing power that most university graduate schools couldn’t dream of. They weren’t learning about computers from a book; they were living and breathing code, toying with the machine late into the night, letting their creativity run wild. This was not a small advantage. Housel quantifies the odds: out of roughly 303 million high-school-aged people in the world in 1968, only about 300 attended Lakeside. Gates himself admits, “If there had been no Lakeside, there would have been no Microsoft.” He received a one-in-a-million head start, a stroke of luck that placed him in the right place, at the right time, with the right tools and the right peer.
Now, consider the story of Kent Evans. Evans was Bill Gates’s best friend in eighth grade and, by Gates’s own admission, the best student in their class. He shared Gates’s obsession with the Lakeside computer, his sharp business mind, and his boundless ambition. They were a team, constantly scheming about the future, whether they would be CEOs, generals, or ambassadors. They were destined to do it together. Kent Evans could very well have been the third co-founder of Microsoft. But he never got the chance. Before graduating from high school, Kent was killed in a mountaineering accident.
This is the other side of the coin. Just as Gates was the beneficiary of a one-in-a-million stroke of good luck, Evans was the victim of a one-in-a-million stroke of bad luck—a fatal risk. The same powerful, random force that propelled one life into the stratosphere tragically cut the other short. It had nothing to do with their intelligence, their drive, or the quality of their decisions. It was simply the reality of risk. For every Bill Gates, Housel suggests, there is a Kent Evans—someone equally skilled and driven who ended up on the other side of life’s roulette wheel. This stark contrast forces us to confront the reality that luck and risk are not just footnotes in the story of success and failure; they are often the headline characters.
2. The Challenge of Perception: Why We Systematically Underestimate Randomness
If the influence of luck and risk is so profound, why do we so often ignore it? Housel argues that our brains are wired to create simple, clean narratives of cause and effect, and randomness makes for a messy, unsatisfying story. This leads to a dangerous cognitive bias in how we interpret financial success and failure.
When judging others, we find it difficult to attribute their success to luck. To do so sounds envious and dismissive of their hard work. It’s more socially acceptable and cognitively easier to say, “Warren Buffett is a genius investor,” than it is to say, “Warren Buffett is a genius investor who also had the incredible luck of being born in the 20th century in America, a time and place of unprecedented economic growth, and who has lived an unusually long and healthy life, allowing the magic of compounding to work for an unparalleled 75+ years.” Both statements are true, but the first one is simpler and more flattering. Conversely, when we see others fail, it’s easy to point to their mistakes. “He was too greedy,” “She didn’t do enough research,” “They made a bad call.” These explanations make the world feel predictable and just. They imply that failure is a choice, and therefore avoidable if we just make better choices.
When judging ourselves, the bias flips. Our successes, we feel, are the direct result of our intelligence, grit, and savvy. This is a natural and ego-preserving way to think. However, when we fail, we are quick to chalk it up to external factors—a sudden market downturn, an unpredictable event, or just plain bad luck. We can construct elaborate narratives to justify our decisions and attribute the poor outcome to risk. “I made a good decision that had an 80% chance of succeeding, and I just ended up on the wrong side of the 20%.” While this might sometimes be true, our tendency to apply this logic to ourselves but not to others creates a distorted view of reality.
This asymmetry is dangerous because it corrupts our ability to learn. We end up trying to emulate the specific actions of highly successful people, not realizing that their success may be due to an unrepeatable lucky streak. The cover of Forbes magazine celebrates the investor who made a reckless bet that paid off (luck), not the prudent investor who made a series of good decisions but was hit by an unforeseen risk. We learn the wrong lessons because we are studying the outcome, not the process, and the outcome is always contaminated by luck and risk.
3. The Peril of Outliers: Why You Shouldn’t Copy Your Idols
This leads to another crucial point: the more extreme the outcome, the more likely it was influenced by extreme luck or risk. Therefore, studying the most extreme examples of success—the billionaires, the legendary CEOs—is often the least effective way to learn actionable lessons for your own life.
Housel uses the examples of 19th-century tycoons like Cornelius Vanderbilt and John D. Rockefeller. Both men were notorious for flouting laws and engaging in ruthless business practices. In hindsight, because they were wildly successful, their actions are often framed by historians as “bold,” “visionary,” and “cunning.” They are praised for not letting outdated rules get in their way. But this is a narrative written by the victors. One can easily imagine an alternate history where their companies were crushed by legal challenges, and their stories became cautionary tales of criminality and failure. The line between “inspiringly bold” and “foolishly reckless” is often a millimeter thick and only visible with hindsight. The success of their risky behavior was not preordained; it was heavily influenced by luck—the luck of operating in a specific legal and economic environment that they could bend to their will.
This applies to modern icons as well. Mark Zuckerberg is hailed as a genius for turning down Yahoo’s $1 billion buyout offer in 2006. He saw the future and held his ground. But in the same breath, people criticize Yahoo for turning down Microsoft’s massive buyout offer a few years later. The actions were similar—a CEO rejecting a buyout—but the outcomes were polar opposites. What is the lesson for an entrepreneur? The truth is, there is no single, clear lesson, because the outcome in both cases was heavily dependent on the unpredictable forces of market evolution—luck and risk.
Trying to emulate the specific tactics of these outliers is like trying to win the lottery by copying the numbers of the previous winner. The strategy is flawed because it ignores the role of randomness. The lesson from Vanderbilt is not “break the law.” The lesson from Zuckerberg is not “always turn down buyout offers.” Their stories are too unique, too colored by the extreme luck they experienced, to be a reliable guide for anyone else.
4. The Better Path: Focusing on Broad Patterns
If we cannot reliably learn from specific individuals, what should we do? Housel’s solution is elegant and practical: focus less on specific individuals and case studies and more on broad, universal patterns of success and failure.
Instead of trying to replicate Warren Buffett’s specific stock picks, study the broad pattern that his success is built upon: longevity, patience, a high savings rate in his early years, and emotional discipline during periods of panic. These are behaviors that anyone can emulate, regardless of the market environment. Instead of trying to be the next Bill Gates by dropping out of college to start a company, study the broad pattern that successful people tend to possess a deep passion and an obsessive curiosity for their field.
The more common a pattern is, the more likely it is to be applicable to your own life. The success of one individual is a data point of one. But the observation that people who have control over their time tend to be happier, or that those who consistently save a portion of their income build wealth, are broad patterns derived from millions of data points. These lessons are more robust and more actionable. They are not dependent on a one-in-a-million lucky break.
This approach requires a fundamental shift in mindset. It means acknowledging that you can’t guarantee a specific outcome, but you can increase your odds of a favorable outcome by adopting the right behaviors. The most important behavior, informed by the reality of risk, is ensuring your own survival. This means avoiding risks that can wipe you out, even if they have a high potential upside. As Nassim Taleb says, “Having an ‘edge’ and surviving are two different things: the first requires the second.” Arranging your financial life so that you can withstand the inevitable setbacks—the harsh reality of risk—is what allows you to stay in the game long enough for the odds of luck to eventually fall in your favor.
Conclusion: The Wisdom of Humility and Forgiveness
Ultimately, a true respect for luck and risk leads to two of the most important dispositions in finance: humility and forgiveness. Bill Gates’s own reflection, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose,” is a perfect encapsulation of this. When things are going well, remembering the role that luck played in your success fosters humility. It reminds you that you are not invincible and that risk, luck’s sibling, can turn your story around just as quickly.
Conversely, when things go wrong, remembering the role of risk fosters forgiveness. It prevents you from concluding that your decisions were terrible when they may have simply been the victim of the unforgiving realities of probability. It allows you to learn the right lesson, which is not always “I made a mistake,” but sometimes, “I took a reasonable risk and it didn’t work out, and that is a normal part of the process.”
By internalizing that nothing is as good or as bad as it seems, we can navigate our financial lives with a more balanced and resilient perspective. We can focus on what we can control—our own effort, our behavior, our savings, our patience—while accepting that the final outcome will always be a dance between our decisions and the unpredictable, powerful, and inseparable forces of luck and risk.