Thomas Edison expected light to emanate from the bulb each time he tried his experiment. Finally, on the 2774th attempt, he used a bamboo filament that proved successful. Like most inventors, his expectations often fell short of reality.
Are your expectations any different than Edison’s? Probably not. You fully expect the decisions that you make to work exactly as you planned. However, your expectations can’t be relied upon to be a map of the future.
Think about some of your financial decisions. Have the real-life outcomes resembled the expectations you had before the decisions were made?
WHY EXPECTATIONS CAN BE FAULTY
When you approach decisions, you anticipate several possibilities. Because decisions are largely based on emotions, you tend to overweight positive possibilities and underweight the negative possibilities.
Every good thing that you can imagine as a possibility also has a downside. Life experiences often don’t match your expectations. There are always potential risks. The whole range of possibilities runs from optimistic to chaos, with most of the outcomes somewhere in between these extremes.
Facts get in the way of your feelings. When you make financial choices, it’s common to downplay the facts. You might have an analytical mind, but you’re still made up of a bundle of feelings. It’s impossible to be coldly rational.
When decisions don’t pan out like you expected this becomes part of your history. Your personal history helps you fine-tune expectations for future decisions. Poor decisions can linger and create long-lasting scar tissue that influences your ability to make good choices.
HOW TO CONNECT THE DOTS
Author and Nobel laureate Daniel Kahneman says “the world is difficult to anticipate; the world is surprising.” In many ways, when your expectations are at odds with reality, it’s due to a failure of imagination.
Oftentimes, an investment decision that hasn’t worked as you expected comes down to a time-frame conflict. If you invested in the stock market and six months later you have a paper loss, that doesn’t necessarily mean the investment decision was poor; it just means six months is a short time-frame in the market.
The really hard part to accept when it comes to investing is that your expectations are based on faulty and limited information. The good news is that every other investor also derives their expectations from imperfect knowledge as well.
Related: Inertia: The Silent Killer