Your client’s financial success has more to do with what goes on in their mind than the amount of knowledge stored up in yours.

Once you accept that, you also quickly realize the importance of understanding what goes on in your client’s minds when it comes to money, finances, and life.

Fortunately, in his book The Psychology of Money, Morgan Housel explains exactly what these forces are guiding our client’s thoughts and behaviors around money.

The Psychology of Money: Timeless lessons on wealth, greed, and happiness:  Housel, Morgan: 9780857197689: Amazon.com: Books

*First and foremost, if you haven’t read the book, click on the link above to order a copy before reading any further. Your clients and your practice will be infinitely better off!

And, in an industry where the value and future of the profession is headed towards the intersection of technical knowledge and the human side of money, the ability to understand what’s going on inside your client’s mind carries the same importance as the ability to build a financial plan and construct a portfolio.

Here are the twenty-two most important ones you need to know:

1) Money Decisions Are Made Through The Lens Of Personal Experience

“…economists have found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation…not intelligence, education or sophistication.”

2) Knowing Something Is No Match For Experiencing It

“Spreadsheets can model the frequency of big stock market declines. But they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives.”

3) “Luck and risk are dopplegangers…you can’t believe in one without equally respecting the other.” 

“Deciphering between what is luck, what is risk, and what is skill is one of the biggest problems we face when trying to learn about the best way to manage money.”

4) Enough Is Simply An Illusion

“The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important…it gets dangerous when the taste of having more (money, power, prestige) increases ambition faster than satisfaction.”

5) Our Brains Weren’t Built To Comprehend The Logic-Defying Nature of Compounding

“If I ask you to calculate 8+8+8+8+8+8+8+8+8, you can do it in a few seconds (72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (134,217,728).”

6) Small Decisions, Major Implications

“How you behaved as an investor during a few months in late 2008 and early 2009 will likely have more impact on your lifetime returns than everything you did from 2000-2008.”

7) What People Actually Want

“If there’s a common denominator in happiness – a universal fuel for joy – it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It’s the highest dividend money pays.”

8) The Real Value of Money

“Money’s greatest intrinsic value is its ability to give you control over your time. Using your money to buy time and options has a lifestyle benefit that few luxury goods can compete with.”

9) Money Can’t Buy Respect

“Using money to buy fancy things may bring less of it (respect) than you imagine…Humility, kindness, and empathy will bring you more respect than horsepower ever will.”

10) Seeing Is Believing, But Real Wealth Is Hidden

“Most people want freedom and flexibility, which is what financial assets not yet spent can give you. But…we don’t get to see the restraint that it takes to actually be wealthy. And since we can’t see it, it’s hard to learn about it.”

11) Increase Your Humility, Increase Your Savings

“When you define savings as the gap between your ego and your income, you realize why many people with decent incomes save so little. People with enduring personal finance success tend to have a propensity to not give a damn about what others think about them.”

12) “Reasonable > Rational”

“People do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.”

“Good decisions aren’t always rational. At some point, you have to choose between being happy or being ‘right.’”

13) History Is Not Prophecy

“People often view history as a guide to the future…The problem is we often use events like the Great Depression and WWII to guide our views of things like worst-case scenarios when thinking about future investment returns. But those record-setting events had no precedent when they occurred.”

14) Volatility Wreaks More Havoc On Your Mind Than Your Money

“Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of paying bills and staying cash-flow positive. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche.”

15) Risk Is Invincible

“You can plan for every risk except the things that are too crazy to cross your mind. And those crazy things can do the most harm, because they happen more often than you think and you have no plan for how to deal with them.”

16) Our Future Self is a Stranger

“Long-term financial planning is essential. But things change – both the world around you, and your own goals and desires. It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift.”

17) The Mental Price of Successful Investing

“Successful investing looks easy when you’re not the one doing it. Successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret – all of which are easy to overlook until you’re dealing with them in real time.”

18) The Social Dilemma of Money Decisions

“While we can see how much money other people spend on cars, homes, clothes, and vacation, we don’t get to see their goals, worries, or aspirations.”

19) Pessimism’s Pleasant Surprise

“Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about. Expecting things to be bad is the best way to be pleasantly surprised when they’re not.”

20) Our Actions Warp Our Beliefs

“If you think a recession is coming and you cash out your stocks in anticipation, your view of the economy is suddenly going to be warped by what you want to happen. Every blip, every anecdote will look like a sign that doom has arrived – maybe not because it has, but because you want it to.”

21) Stories Fill Blind Spots

“We all want the complicated world we live in to make sense. So, we tell ourselves stories to fill in the gaps of what are effectively blind spots.”

22) The Illusion of Control

“Wanting to believe we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.”