The Art of Thinking Clearly: Better Thinking, Better Decisions

See also Exponential Growth (ch. 34); Will Rogers Phenomenon (ch. 58)

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62
HANDLE WITH CARE
Expectations
On 31 January 2006, Google announced its financial results for the final quarter
of 2005. Revenue: up 97%. Net profit: up 82%. A record-breaking quarter. How
did the stock market react to these phenomenal figures? In a matter of seconds,
shares tumbled 16%. Trading had to be interrupted. When it resumed, the stock
plunged another 15%. Absolute panic. One particularly desperate trader inquired
on his blog: ‘What’s the best skyscraper to throw myself off?’
What had gone wrong? Wall Street analysts had anticipated even better
results, and when those failed to materialise, $20 billion was slashed from the
value of the media giant.
Every investor knows it’s impossible to forecast financial results accurately.
The logical response to a poor prediction would be: ‘A bad guess, my mistake.’
But investors don’t react that way. In January 2006, when Juniper Networks
announced eagerly anticipated earnings per share that were a 
tenth
of a cent
lower than analysts’ forecasts, the share price fell 21% and the company’s value
plunged $2.5 billion. When expectations are fuelled in the run-up to an
announcement, any disparity gives rise to draconian punishment, regardless of
how paltry the gap is.
Many companies bend over backwards to meet analysts’ predictions. To
escape this terror, some began publishing their own estimates, so-called
‘earnings guidance’. Not a smart move. Now, the market heeds only these
internal forecasts – and studies them much more closely to boot. CFOs are forced
to achieve these targets to the cent, and so must draw on all the accounting
artifices available.
Fortunately, expectations can also lead to commendable incentives. In 1965,
the American psychologist Robert Rosenthal conducted a noteworthy experiment
in various schools. Teachers were told of a (fake) new test that could identify
students who were on the verge of an intellectual spurt – so-called ‘bloomers’.
Twenty per cent of students were randomly selected and classified as such.
Teachers remained under the impression that these were indeed high-potential

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students. After a year, Rosenthal discovered that these students had developed
much higher IQs than other children in a control group. This effect became known
as the 
Rosenthal effect
(or 
Pygmalion effect
).
Unlike the CEOs and CFOs who consciously tailor their performance to meet
expectations, the teachers’ actions were subconscious. Unknowingly, they
probably devoted more time to the bloomers, and consequently, the group
learned more. The prospect of brilliant students influenced the teachers so much
that they ascribed not just better grades but also improved personality traits to the
‘gifted’ students – a tribute to the 
halo
effect
.
But how do we react to personal expectations? This brings us to the 
placebo
effect – 
pills and therapies that are unlikely to improve health, but do so anyway.
T h e 
placebo effect
has been registered in one-third of all patients. But how it
works is not well understood. All we know is that expectations alter the
biochemistry of the brain and thus the whole body. Accordingly Alzheimer’s
patients cannot benefit from it: their condition impairs the area of the brain that
deals with expectations.
Expectations are intangible, but their effect is quite real. They have the power
to change reality. Can we deprogramme them? Is it possible to live a life free from
expectations? Unfortunately not. But you can deal with them more cautiously.
Raise expectations for yourself and for the people you love. This increases
motivation. At the same time, lower expectations for things you cannot control –
for example, the stock market. As paradoxical as it sounds, the best way to shield
yourself from nasty surprises is to anticipate them.