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Concept

Luck and Risk

Luck and risk is Morgan Housel's principle that every financial outcome is shaped by forces outside anyone's control, which lift some people above what their decisions earned and drop others below it, so a single result says little about the decision behind it.

In The Psychology of Money, Housel calls luck and risk siblings: both are the reality that outcomes are never purely the product of individual effort, because the economy, timing and accident act on every decision. His illustration is Bill Gates, who in the late 1960s attended one of the very few high schools in the world with a computer, a chance Gates himself says shaped his path. His close friend at the same school, Kent Evans, was by Gates's account just as gifted and ambitious, and died in a mountaineering accident before finishing school. One story shows how far luck can carry talent; the other shows how easily risk can take it away. The two are mirror images, and we tend to see only half of each: we credit our own successes to skill and blame other people's failures on their choices. The practical lesson is to be careful whom you praise and admire, and equally careful whom you look down on. The most extreme results are the ones most likely to come from forces nobody can copy, so learn from broad patterns that hold across many people rather than from single heroes or villains.

A real-life example

In 2019 two friends in Ankara, Ozan and Mert, each put about 450,000 lira of savings into a small café: Ozan's next to a university, Mert's across from a hospital. When classes moved online, Ozan's customers vanished almost overnight, while Mert's door never ran short of patients' relatives. Today Mert gives talks on entrepreneurship, and Ozan believes he has no head for business. The plan was the same and so was the effort; what differed was the street the door opened onto.

How to use it

  1. 1Before copying someone's success, write down which parts of it were choice and which were timing, place or chance.
  2. 2Judge your own decisions by the information you had when you made them, not by how they happened to turn out.
  3. 3Learn from patterns that work for many people, such as saving steadily or avoiding debt you could not repay, rather than from one famous winner or loser.