Luck & Risk

Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort. They’re so similar that you can’t believe in one without equally respecting the other.

The problem is that we tend to see luck in our failures and skill in our successes—while seeing the opposite in others. This bias makes it hard to learn from both success and failure.

Bill Gates and Kent Evans

Bill Gates went to one of the only high schools in the world that had a computer in 1968—Lakeside School in Seattle. One in a million students had access to the kind of computer Gates had. He was skilled, but he was also extraordinarily lucky.

Kent Evans was Gates’s best friend at Lakeside and equally skilled with computers. Evans died in a mountaineering accident before graduating. The two had the same skills, the same opportunities, the same environment—but vastly different outcomes.

If you had to name the most important factor in Gates’s success, what would you say? His skill? His drive? Or the one-in-a-million chance that his school had a computer?

The Difficulty of Measurement

The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money. We default to studying successful people and trying to replicate their approach. But if luck plays a bigger role than we think, this strategy breaks down.

The Problem with Role Models

When studying success stories, we’re studying the outcomes of a complex mix of luck and skill. The problem is we can’t easily separate them. So when we try to replicate what made someone successful, we might be copying the wrong things—the parts that were luck, not skill.

Cornelius Vanderbilt’s Warning

Cornelius Vanderbilt was one of the most successful businessmen in American history. But his son William once asked him why he didn’t just retire and enjoy his wealth. Vanderbilt responded: “What would I do? I’ve got nothing else to do. I’d die.”

Was Vanderbilt’s relentless drive the key to his success? Or was he just unable to stop? Would the same drive destroy someone in different circumstances? These questions have no clear answers.

A More Useful Approach

Instead of studying specific successful people, study broad patterns. Look at what tends to work across large groups over long periods. The more extreme an outcome (billionaire or bankruptcy), the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme luck or risk.

Practical Implications

Understanding the role of luck and risk leads to some important conclusions:

The Attribution Trap

When things go well, we tend to attribute it to skill. When things go badly, we blame luck or outside forces. We do the opposite when judging others. This cognitive bias makes learning from experience extremely difficult.

Focus on What You Can Control

Since luck and risk are impossible to measure and largely out of our control, the best we can do is:

• Focus on things that are likely to be true over time
• Study broad patterns rather than individual cases
• Build room for error into every plan
• Avoid the temptation to attribute outcomes entirely to skill or luck

Key Takeaways

• Luck and risk are two sides of the same coin: Every outcome involves both, and they’re impossible to fully separate
• Be humble about success: You can’t know how much was skill versus luck
• Be compassionate about failure: Bad outcomes don’t always mean bad decisions
• Study patterns, not people: What works across many cases is more reliable than what worked for one person
• Nothing is as good or as bad as it seems: Extreme outcomes are extreme for reasons we may not understand