The instructions on the official Ruby on Rails website, were not working for me, so here is how it really works.

The most important part first: You have to setup a password for your account, otherwise it is not going to work.

Then open the Terminal (Go > Utilities > Terminal) and type

sudo gem update –system

hit ENTER.

Type your password and hit ENTER again.

sudo gem install rails

hit ENTER.

sudo gem update rake

hit ENTER.

sudo gem update sqlite3-ruby

hit ENTER.

now Ruby on Rails should run in the latest version!