Main Argument 6: Tails, You Win
A profoundly counterintuitive and liberating argument in “The Psychology of Money” is that a small number of events are responsible for the vast majority of outcomes. This is the concept of “long tails,” where a few extreme, outlier events—the “tails” of a distribution curve—have a disproportionate and decisive impact on the whole. Housel argues that nearly everything important in business, investing, and finance is driven by these tail events. The critical psychological takeaway is that because these events are rare, we systematically fail to account for them. We expect a normal, linear distribution of results, when reality is anything but. This leads to a fundamental misunderstanding of success and failure. We don’t realize that it is normal for most of our individual investments, business ideas, and strategic decisions to be mediocre or to fail outright. Success is not about being right most of the time; it’s about achieving a few massive, tail-event wins that are powerful enough to overwhelm the cumulative effect of all your misses. Grasping this concept changes everything about how you measure your own performance, how you react to failure, and where you should focus your efforts.
To truly understand the power of tails, we must abandon our intuitive sense of how the world should work and embrace a statistical reality that governs everything from art collections to the stock market to our own behavior during a crisis.
1. The Tail-Driven World: From Art Collections to Corporate Giants
Housel begins by illustrating the concept with tangible, non-financial examples to make the abstract idea concrete.
He tells the story of Heinz Berggruen, one of the 20th century’s most successful art dealers. How could one person be so adept at identifying future masterpieces in a field as subjective as art? The answer was not a magic eye for talent, but a strategy of diversification and patience that perfectly mirrors the logic of tail-driven returns. Berggruen bought vast quantities of art. He operated like an index fund, acquiring a broad portfolio of works from many different artists. The vast majority of these pieces—perhaps 99%—turned out to be of little value. But it didn’t matter. Because a tiny fraction of his collection, the 1%, turned out to be the works of masters like Picasso, Klee, and Matisse. These few tail-event successes were so stupendously valuable that they made the entire collection a monumental success. Berggruen could be wrong almost all of the time and still end up colossally right. As Horizon Research put it, “That’s all that happens.”
This same dynamic is at play in the business world. Walt Disney’s early career was a string of financial struggles. He produced over 400 cartoons in the years leading up to 1938. Most were beloved by audiences, but they consistently lost money. The studio was perpetually on the brink of bankruptcy. Then, in 1938, came Snow White and the Seven Dwarfs. The film was a tail event of epic proportions. The money it generated in its first six months was an order of magnitude greater than anything the company had ever earned. It single-handedly paid off all the company’s debts, funded a new state-of-the-art studio, and transformed Walt Disney from a famous animator into a cultural icon. In business terms, the 83 minutes of Snow White were all that mattered; they were the tail that paid for hundreds of hours of failed experiments.
2. The Shocking Secret of the Stock Market: Your Index Fund is a Venture Capital Fund in Disguise
The common wisdom is that tail dynamics define high-risk ventures like art dealing and startups. Venture capital is the classic example: a VC firm expects most of its portfolio companies to fail, a few to do okay, and one or two “unicorns” to generate 100% of the fund’s returns. Data confirms this: 65% of venture-backed startups lose money, while a mere 0.5% deliver the 50x-plus returns that make the entire model work. We accept this as the price of admission for investing in innovation.
But Housel’s most powerful and paradigm-shifting insight is that this is exactly how the broad, “safe” public stock market works, too. We think of an index fund like the S&P 500 or the Russell 3000 as a diversified basket of hundreds of solid, successful companies. But this is a complete illusion. A diversified index is also a tail-driven machine.
Housel cites a stunning J.P. Morgan analysis of the Russell 3000 index from 1980 to 2014. The findings dismantle our conventional view of the market:
- 40% of all companies in the index suffered a “catastrophic loss,” meaning they lost at least 70% of their value and never recovered. These were not just fly-by-night startups; they were established public companies that effectively went to zero.
- The majority of companies underperformed cash.
- Effectively all of the index’s overall returns came from just 7% of its component companies that were “mega-winners,” outperforming the average by a massive margin.
This means that the spectacular 73-fold growth of the Russell 3000 over that period was not a team effort. It was the result of a handful of superstars like Microsoft and Walmart dragging the dead weight of hundreds of failures and mediocre performers along with them. Your “diversified” index fund is not a collection of 500 good companies. It is a collection of a few phenomenal companies and 400-plus disappointments. The success of the entire index is a tail event. Even within those winning companies, success is often driven by tails. Amazon’s overall success is overwhelmingly due to two tail-event ideas: Amazon Web Services and Prime. Apple’s success is almost entirely the story of one tail-event product: the iPhone.
3. The Tail Events in Your Own Life: Behavior in the Storm
The concept of tails doesn’t just apply to assets; it applies to your own actions as an investor. Your lifetime investment returns will not be determined by the thousands of days when the market is calm and things are going according to plan. They will be determined by your behavior during a handful of days—the tail events—of extreme crisis and panic.
Housel quotes Napoleon’s definition of a military genius as “The man who can do the average thing when all those around him are going crazy.” This is the perfect definition of an investing genius. The “average thing” is simply staying the course, continuing to invest, and not panic-selling. But doing that average thing when markets are in freefall and the media is screaming about the end of the world is extraordinarily difficult.
To quantify this, Housel presents a simple but powerful simulation of three investors from 1900 to 2019.
- Sue invests $1 every month into the stock market, no matter what.
- Jim tries to time the market. He sells his stocks and holds cash during recessions.
- Tom is similar to Jim but is slower to react, selling a few months after a recession begins and reinvesting a few months after it ends.
The results are stark. Sue, who did nothing but the “average thing,” ends up with dramatically more money ($435,551) than both Jim ($257,386) and Tom ($234,476). Recessions make up only a small fraction of the total time period, but the behavior during those short, painful tail events made all the difference. How you behave during the 1% of the time when there is blood in the streets will have more impact on your final outcome than what you do during the other 99% of the time.
4. The Psychological Revolution: Embracing Failure as the Norm
The most important consequence of internalizing the “Tails, You Win” principle is a complete revolution in how you think about failure. If a small minority of things account for the majority of outcomes, then it is a mathematical certainty that the majority of things you try will not be home runs. Failure and mediocrity are the default states in a tail-driven world.
This is profoundly liberating. When an individual stock in your portfolio goes down, you don’t have to see it as a personal failure or a sign of your own incompetence. It’s the normal course of business. Even the legendary Peter Lynch said, “If you’re terrific in this business, you’re right six times out of 10.” That means being wrong 40% of the time is part of a terrific track record.
Visionary CEOs like Jeff Bezos and Reed Hastings understand this better than anyone. When Amazon’s Fire Phone was a disastrous flop, Bezos didn’t apologize. He said, “If you think that’s a big failure, we’re working on much bigger failures right now… Some of them are going to make the Fire Phone look like a tiny little blip.” He knows that to find a tail success like AWS, you must be willing to endure a portfolio of failed experiments. Similarly, Netflix’s Reed Hastings has stated that their “hit ratio is way too high,” pushing his teams to take more risks and accept a higher cancellation rate. They are not celebrating failure for failure’s sake; they are acknowledging that the path to a massive, game-changing tail hit is paved with a high volume of misses.
We, as individuals, rarely see this process. We see Chris Rock’s flawless Netflix special, not the 50 shows in small clubs where he tested and discarded hundreds of jokes that didn’t land. We see Warren Buffett’s final net worth, but we don’t see the full list of his 400-500 lifetime stock picks, the vast majority of which were unremarkable. He and Charlie Munger openly admit that their spectacular long-term record is the result of a handful of truly great investments. When we only see the polished, successful tail outcomes, we develop an unrealistic expectation of what the path to success looks like. We see our own messy, failure-ridden journey and incorrectly conclude that we are doing something wrong.
Conclusion: A New Framework for Success
“Tails, You Win” is more than a statistical observation; it is a new framework for thinking about life and money. It teaches us that success is a numbers game, but not in the way we think. It’s not about having a high batting average. It’s about ensuring you take enough swings at the plate to eventually hit a few grand slams, and that those grand slams are big enough to make up for all the strikeouts.
The practical advice that flows from this is twofold. First, diversify. You must own a wide enough range of assets or try a wide enough range of things that you increase your chances of being exposed to an unpredictable, explosive tail winner. Second, have endurance. You must be able to financially and psychologically survive the long periods of mediocrity and the inevitable failures so that you can stick around long enough for the tails to emerge and work their magic. It means judging your portfolio as a whole, not by its individual parts, and it means being comfortable with the idea that you can be wrong most of the time and still win big.