Luck & Risk


                                CHAPTER 2

                 Luck & Risk

Nothing is as good or as bad as it seems.

Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.

NYU professor Scott Galloway has a related idea that is so important to remember when judging success—both your own and others’: “Nothing is as good or as bad as it seems.”

Bill Gates went to one of the only high schools in the world that had a computer.

The story of how Lakeside School, just outside Seattle, even got a computer is remarkable.

Bill Dougall was a World War II navy pilot turned high school math and science teacher. “He believed that book study wasn’t enough without real-world experience. He also realized that we’d need to know something about computers when we got to college,” recalled late Microsoft co-founder Paul Allen.

In 1968 Dougall petitioned the Lakeside School Mothers’ Club to use the proceeds from its annual rummage sale—about $3,000—to lease a Teletype Model 30 computer hooked up to the General Electric mainframe terminal for computer time-sharing. “The whole idea of time-sharing only got invented in 1965,” Gates later said. “Someone was pretty forwardlooking.” Most university graduate schools did not have a computer anywhere near as advanced as Bill Gates had access to in eighth grade. And he couldn’t get enough of it.

Gates was 13 years old in 1968 when he met classmate Paul Allen. Allen was also obsessed with the school’s computer, and the two hit it off.

Lakeside’s computer wasn’t part of its general curriculum. It was an independent study program. Bill and Paul could toy away with the thing at their leisure, letting their creativity run wild—after school, late into the night, on weekends. They quickly became computing experts.

During one of their late-night sessions, Allen recalled Gates showing him a Fortune magazine and saying, “What do you think it’s like to run a Fortune 500 company?” Allen said he had no idea. “Maybe we’ll have our own computer company someday,” Gates said. Microsoft is now worth more than a trillion dollars.

A little quick math.

In 1968 there were roughly 303 million high-school-age people in the world, according to the UN.

About 18 million of them lived in the United States.

About 270,000 of them lived in Washington state.

A little over 100,000 of them lived in the Seattle area.

And only about 300 of them attended Lakeside School.

Start with 303 million, end with 300.

One in a million high-school-age students attended the high school that had the combination of cash and foresight to buy a computer. Bill Gates happened to be one of them.

Gates is not shy about what this meant. “If there had been no Lakeside, there would have been no Microsoft,” he told the school’s graduating class in 2005.

Gates is staggeringly smart, even more hardworking, and as a teenager had a vision for computers that even most seasoned computer executives couldn’t grasp. He also had a one in a million head start by going to school at Lakeside.

Now let me tell you about Gates’ friend Kent Evans. He experienced an equally powerful dose of luck’s close sibling, risk.

Bill Gates and Paul Allen became household names thanks to Microsoft’s success. But back at Lakeside there was a third member of this gang of high-school computer prodigies.

Kent Evans and Bill Gates became best friends in eighth grade. Evans was, by Gates’ own account, the best student in the class.

The two talked “on the phone ridiculous amounts,” Gates recalls in the documentary Inside Bill’s Brain. “I still know Kent’s phone number,” he says. “525-7851.”

Evans was as skilled with computers as Gates and Allen. Lakeside once struggled to manually put together the school’s class schedule—a maze of complexity to get hundreds of students the classes they need at times that don’t conflict with other courses. The school tasked Bill and Kent—children, by any measure—to build a computer program to solve the problem. It worked.

And unlike Paul Allen, Kent shared Bill’s business mind and endless ambition. “Kent always had the big briefcase, like a lawyer’s briefcase,” Gates recalls. “We were always scheming about what we’d be doing five or six years in the future. Should we go be CEOs? What kind of impact could you have? Should we go be generals? Should we go be ambassadors?” Whatever it was, Bill and Kent knew they’d do it together.

After reminiscing on his friendship with Kent, Gates trails off.

“We would have kept working together. I’m sure we would have gone to college together.” Kent could have been a founding partner of Microsoft with Gates and Allen.

But it would never happen. Kent died in a mountaineering accident before he graduated high school.

Every year there are around three dozen mountaineering deaths in the United States.⁹The odds of being killed on a mountain in high school are roughly one in a million.

Bill Gates experienced one in a million luck by ending up at Lakeside. Kent Evans experienced one in a million risk by never getting to finish what he and Gates set out to achieve. The same force, the same magnitude, working in opposite directions.

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

But both are so hard to measure, and hard to accept, that they too often go overlooked. For every Bill Gates there is a Kent Evans who was just as skilled and driven but ended up on the other side of life roulette.

If you give luck and risk their proper respect, you realize that when judging people’s financial success—both your own and others’—it’s never as good or as bad as it seems.

Years ago I asked economist Robert Shiller, who won the Nobel Prize in economics, “What do you want to know about investing that we can’t know?”

“The exact role of luck in successful outcomes,” he answered.

I love that response, because no one actually thinks luck doesn’t play a role in financial success. But since it’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as a factor of success.

If I say, “There are a billion investors in the world. By sheer chance, would you expect 10 of them to become billionaires predominantly off luck?” You would reply, “Of course.” But then if I ask you to name those investors—to their face—you will likely back down.

When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept.

Economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. If you are rich and tall, your brother is more likely to also be rich than he is tall. I think most of us intuitively know this is true—the quality of your education and the doors that open for you are heavily linked to your parents’ socioeconomic status. But find me two rich brothers and I’ll show you two men who do not think this study’s findings apply to them.

Failure—which can be anything from bankruptcy to not meeting a personal goal—is equally abused.

Did failed businesses not try hard enough? Were bad investments not thought through well enough? Are wayward careers due to laziness? Sometimes, yes. Of course.

But how much? It’s so hard to know. Everything worth pursuing has less than 100% odds of succeeding, and risk is just what happens when you end up on the unfortunate side of that equation. Just as with luck, the story gets too hard, too messy, too complex if we try to pick apart how much of an outcome was a conscious decision versus a risk.

Say I buy a stock, and five years later it’s gone nowhere. It’s possible that I made a bad decision by buying it in the first place. It’s also possible that I made a good decision that had an 80% chance of making money, and I just happened to end up on the side of the unfortunate 20%. How do I know which is which? Did I make a mistake, or did I just experience the reality of risk?

It’s possible to statistically measure whether some decisions were wise. But in the real world, day to day, we simply don’t. It’s too hard. We prefer simple stories, which are easy but often devilishly misleading.

After spending years around investors and business leaders I’ve come to realize that someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk. When judging your failures I’m likely to prefer a clean and simple story of cause and effect, because I don’t know what’s going on inside your head. “You had a bad outcome so it must have been caused by a bad decision” is the story that makes the most sense to me. But when judging myself I can make up a wild narrative justifying my past decisions and attributing bad outcomes to risk.

The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side.

The dangerous part of this is that we’re all trying to learn about what works and what doesn’t with money.

What investing strategies work? Which ones don’t?

What business strategies work? Which ones don’t?

How do you get rich? How do you avoid being poor?

We tend to seek out these lessons by observing successes and failures and saying, “Do what she did, avoid what he did.”

If we had a magic wand we would find out exactly what proportion of these outcomes were caused by actions that are repeatable, versus the role of random risk and luck that swayed those actions one way or the other. But we don’t have a magic wand. We have brains that prefer easy answers without much appetite for nuance. So identifying the traits we should emulate or avoid can be agonizingly hard.

Let me tell you another story of someone who, like Bill Gates, was wildly successful, but whose success is hard to pin down as being caused by luck or skill.

Cornelius Vanderbilt had just finished a series of business deals to expand his railroad empire.

One of his business advisors leaned in to tell Vanderbilt that every transaction he agreed to broke the law.

“My God, John,” said Vanderbilt, “You don’t suppose you can run a railroad in accordance with the statutes of the State of New York, do you?”

My first thought when reading this was: “That attitude is why he was so successful.” Laws didn’t accommodate railroads during Vanderbilt’s day. So he said “to hell with it” and went ahead anyway.

Vanderbilt was wildly successful. So it’s tempting to view his law-flaunting—which was notorious and vital to his success—as sage wisdom. That scrappy visionary let nothing get in his way!

But how dangerous is that analysis? No sane person would recommend flagrant crime as an entrepreneurial trait. You can easily imagine Vanderbilt’s story turning out much different—an outlaw whose young company collapsed under court order.

So we have a problem here.

You can praise Vanderbilt for flaunting the law with as much passion as you criticize Enron for doing the same. Perhaps one got lucky by avoiding the arm of the law while the other found itself on the side of risk.

John D. Rockefeller is similar. His frequent circumventing of the law—a judge once called his company “no better than a common thief”—is often portrayed by historians as cunning business smarts. Maybe it was. But when does the narrative shift from, “You didn’t let outdated laws get in the way of innovation,” to “You committed a crime?” Or how little would the story have to shift for the narrative to have turned from “Rockefeller was a genius, try to learn from his successes,” to “Rockefeller was a criminal, try to learn from his business failures.” Very little.

“What do I care about the law?” Vanderbilt once said. “Ain’t I got the power?”

He did, and it worked. But it’s easy to imagine those being the last words of a story with a very different outcome. The line between bold and reckless can be thin. When we don’t give risk and luck their proper billing it’s often invisible.

Benjamin Graham is known as one of the greatest investors of all time, the father of value investing and the early mentor of Warren Buffett. But the majority of Benjamin Graham’s investing success was due to owning an enormous chunk of GEICO stock which, by his own admission, broke nearly every diversification rule that Graham himself laid out in his famous texts. Where does the thin line between bold and reckless fall here? I don’t know. Graham wrote about his GEICO bonanza: “One lucky break, or one supremely shrewd decision—can we tell them apart?” Not easily.

We similarly think Mark Zuckerberg is a genius for turning down Yahoo!’s 2006 $1 billion offer to buy his company. He saw the future and stuck to his guns. But people criticize Yahoo! with as much passion for turning down its own big buyout offer from Microsoft—those fools should have cashed out while they could! What is the lesson for entrepreneurs here? I have no idea, because risk and luck are so hard to pin down.

There are so many examples of this.

Countless fortunes (and failures) owe their outcome to leverage.

The best (and worst) managers drive their employees as hard as they can.

“The customer is always right” and “customers don’t know what they want” are both accepted business wisdom.

The line between “inspiringly bold” and “foolishly reckless” can be a millimeter thick and only visible with hindsight.

Risk and luck are doppelgangers.

This is not an easy problem to solve. 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.

But two things can point you in a better direction.


Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.


Or, just be careful when assuming that 100% of outcomes can be attributed to effort and decisions. After my son was born, I wrote him a letter that said, in part:


Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.


Therefore, focus less on specific individuals and case studies and more on broad patterns.


Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.

You’ll get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Warren Buffett’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate. But realizing, as we’ll see in chapter 7, that people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it.

My favorite historian, Frederick Lewis Allen, spent his career depicting the life of the average, median American—how they lived, how they changed, what they did for work, what they ate for dinner, etc. There are more relevant lessons to take away from this kind of broad observation than there are in studying the extreme characters that tend to dominate the news.

Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”

When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.

But the same is true in the other direction.

Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.

But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.

Nothing is as good or as bad as it seems.

Now let’s look at the stories of two men who pushed their luck.




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