Is financial success a matter of luck or know-how? What plays a bigger role?
There are so many memoirs and self-help books out there by millionaires that teach readers how to follow in their footsteps—”they got rich by following these steps, and you can too!” However, what these books fail to account for is the role of chance in financial success.
Here’s why success is luck, according to behavioral finance expert Morgan Housel.
Chance Plays a Big Role in Our Financial Lives
In The Psychology of Money, Housel argues that one reason we fail to become financially successful is that we underestimate the role that chance plays in our financial lives.
To illustrate how powerful chance can be to our financial success, Housel describes the story of Bill Gates. Bill Gates achieved his success partly because he was smart and successful. However, Housel argues, it was also because Bill Gates was (literally) one in a million teenagers who had access to a school computer in 1968. Gates himself attributes his computer success to this fact. Kent Evans was a good friend of Gates’ who was similarly adept at computers. However, Evans passed away in a mountaineering accident. The odds of this were also one in a million. Both of these teenagers could have founded Microsoft. The only reason Evans didn’t is due to chance. Similarly, chance plays a large role in all our financial lives.
(Shortform note: In Fooled by Randomness, former trader Nassim Nicholas Taleb adds that it’s not just whether you get lucky that plays a role in your financial success but how early you get lucky—as shown by Gates’ success. In the real world, Taleb argues, early success helps determine subsequent success because if you win an early random advantage, you’re better placed to win subsequent random advantages. He suggests that Microsoft succeeded not because it was the best software available but because Gates got an early advantage through chance contracts and positive feedback.)
Housel argues that we ignore the fact that success is luck for two main reasons:
#1: We Don’t Understand Chance
We all know that chance plays a major role in our lives—and, as Housel notes, it’s technically possible to statistically analyze the relative risk of most decisions. However, most of us don’t do this because it’s too hard. Even if we did, there’s no way to know exactly how big a role chance plays in our lives. Since explaining the role of chance is difficult and in some ways impossible, we don’t talk about it.
(Shortform note: Our lack of understanding about chance leads most laypeople to treat luck as something practically paranormal and totally out of our control: You either get lucky or you don’t. However, Luck Factor suggests that you can increase how lucky you are through several techniques like listening to your instincts.)
#2: We Misattribute the Role of Chance
We generally attribute others’ failures to poor decisions instead of to chance: Since we don’t know how they thought, we default to the simple story that their thought process was somehow wrong. But we generally attribute our own failures to bad luck: We know what went through our mind, so it’s easier to devise complicated explanations for our failures that involve outside forces—like bad luck.
(Shortform note: Our tendency to blame other people’s shortcomings on their personality but our own failures on our circumstances is an example of a psychological concept known as fundamental attribution error. It’s often decried by thought leaders, like Mark Manson in The Subtle Art of Not Giving A F*ck, where he warns against the urge to blame your situation for your problems, arguing that only you can be responsible for your issues because you control how you react to and frame any situation.)
The Risks of Ignoring the Role of Chance
Housel contends that our ignorance of luck and chance is particularly dangerous because many people try to gain wealth by imitating individual financial success stories—but thanks to chance, copying what they did often doesn’t lead to success. Housel argues that many of us try to learn what and what not to do with money by studying the most exceptional financial success stories—like the Bill Gateses of the world. However, Housel argues, the more exceptional the story, the more likely it is that luck played a bigger role in its outcome. Therefore, the more exceptional the story, the more unique it is and thus the less likely you are to be able to learn lessons from it.
So, Housel recommends instead, pay attention to patterns, not people. As Housel notes, if many wealthy people did Thing A instead of Thing B, it’s more probable that doing Thing A will make you wealthy. However, if only one person did Thing B and still got wealthy, it’s more likely that chance played a larger role in her success—and doing Thing B is less likely to make you wealthy.
|Why Paying Attention to Patterns Won’t Make You Bill Gates|
In Fooled by Randomness, Taleb warns that although you can achieve moderate success by following the patterns of wealthy people, you’re unlikely to achieve wild success—the kind with millions of dollars and lasting fame—without luck: a positive rare event plus a lack of negative rare events. Taleb notes that wildly successful people might all exhibit patterns of behavior, like a willingness to work hard and take risks, but that doesn’t mean every hardworking risk-taker is a millionaire. Just because a skill or a pattern of behavior is necessary for wild success doesn’t mean that it caused wild success.
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Here's what you'll find in our full The Psychology of Money summary :
- Why the key to financial success lies in understanding human behavior
- How to make better financial decisions
- How chance plays a bigger role in our financial lives than we think