When Expectations Don't Match Reality

Expectations are very tricky because they're almost always wrong. But our expectations drive our behavior anyway.

Our view of the future is the fundamental basis for how we act today. Since our expectations about the future are regularly based on our recent experience, we act as if the next week, month, and year will be just like the last one.

We are programmed that way. In fact it is a genetic trait of humans to base our view of the future (our expectations) on the past; we have very little else to base it on. But we have very short-term memories, so our natural inclination is to define the past as the very recent past.

Unless we train ourselves differently, we think that what just happened will continue into the foreseeable future, and we will act based on that expectation.

When every house you buy is worth 10% more six months later, you start to expect that to continue. If you expect home values to rise 10% every six months, then you buy a bigger house or use your home equity to buy a boat.

Then one day something changes.

When behavior reaches extremes it does not take much to surprise us. After a while, we adjust our expectations and begin to think that how things are right now will continue into the foreseeable future. And we start to behave differently based on those expectations.

Of course, that behavior will eventually reach extremes as well. These boom-and-bust cycles seem to overshoot what seems rational in hindsight. Looking back, it's almost always painfully obvious that we allowed our expectations to get out of whack.

The solution is simple, but it's not easy to execute. We need to train ourselves to lengthen our definition of the past.

That's why history is so important. It has been said that the three most important words in the English language are remember, remember, remember.

So we need to remember those times in our lives when things changed. Think of the times when you expected things to happen a certain way based on your recent experience. You then changed your behavior to reflect those expectations. Then, just at the point where that behavior reached an extreme, something changed and you found yourself wishing you had behaved differently.

I imagine we won't have to look too far into the past to see examples. The concern I have is that most of us have already forgotten the very things that would help.

A version of this post appeared previously at The New York Times.

Carl Richards is a financial planner and the director of investor education for the BAM ALLIANCE, a community of more than 130 independent wealth management firms throughout the United States. Visit Behavior Gap for more of Carl's sketches and writings.

The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2240154, ~/Articles/ArticleHandler.aspx, 9/27/2016 6:45:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 9 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes