CODEXCard 4 of 7 · The Psychology of Money
Tail events in investing (Tails Drive Everything)
A few decisions account for most of the outcome.
Tail events in investing are the rare, extreme outcomes that sit at the edges of a distribution. Morgan Housel argues that these tails drive most of what happens. In a broad stock index, a minority of companies tend to account for a large share of long-term gains. The same lopsided pattern shows up in careers, businesses and creative work.
The practical consequence is that judging your decisions one by one can mislead you. Many investments, projects or attempts will disappoint, and that is normal. What matters is whether the few that succeed are big enough to carry the rest. This is why diversified index funds can work well for ordinary investors, since they automatically hold the eventual winners without needing to predict them. It is also why a long career with many small bets can pay off through one or two breakthroughs.
The trap is going all-in on a single potential tail, betting your savings on one stock or one venture because big winners exist. Tail exposure means holding a slice of possible outsized outcomes inside a sturdy, diversified base. It is about how you build a portfolio, not an invitation to gamble.
This links to the next card, because owning the tails also means living with the swings that come with them.
Example
A freelance illustrator pitches dozens of small clients a year. Most jobs are routine and some fall through. One year, a single book cover leads to a long relationship with a publisher that changes her income. She did not predict which pitch would matter. She just kept sending enough of them.
Try it this week
Look at one area of your life, such as money or career, and check that you hold at least a few small bets with large upside.
From The Psychology of Money (Morgan Housel · 2020).
