I have read that any normal operator, $M$, on a vector space $V$ is diagonal wrt some orthonormal basis for $V$.
The book I'm reading then says that $M$ can be written as $\sum_i \lambda_i |i\rangle\langle i|$ where the vectors are eigenvectors that make up the basis. I was under the impression that, when it is in this form (the eigenbasis), if you were to turn the outer products into matrices and add them the matrix would be diagonal, but when I do it for the matrix $$\begin{bmatrix}4&3\\3&4\end{bmatrix}$$ it just ends up back where I started. How does $\sum_i \lambda_i |i\rangle\langle i|$ indicate a diagonal matrix?
A normal operator $M$ on a finite dimensional complex vector space $V$ is diagonal with respect to some orthonormal basis of $V$. The result does not hold if $V$ is real. The result says that there exists and orthonormal basis $v_1, \dots, v_n$ of $V$ and $\lambda_1, \dots, \lambda_n \in \mathbb{C}$ such that $Mv_i = \lambda_i v_i$ for each $i$. What is diagonal is the matrix representation of $M$ with respect to the basis $\{v_1, \dots, v_n\}$. The matrix representation is simply $\text{diag}(\lambda_1, \dots, \lambda_n)$.
The sum of outer products is just another way to write $M$: If $x \in V$ we have \begin{align} Mx &= M(\sum_{i = 1}^{n}(x, v_i)v_i) \\ &= \sum_{i = 1}^{n}(x, v_i)Mv_i \\ &= \sum_{i = 1}^{n}(x, v_i)\lambda v_i \\ &= \sum_{i = 1}^{n}(v_i^*x)\lambda v_i \\ &= \sum_{i = 1}^{n}\lambda v_i(v_i^*x) \\ &= \sum_{i = 1}^{n}\lambda v_iv_i^*x. \end{align} Thus $M = \sum_{i = 1}^{n}\lambda v_iv_i^*$.