5.2 Identifying Predictable Expectations

We have simplified and understand what is going on around us, now we must identify expectations we can measure and predict. Unfortunately not all expectations are predicable. I may expect to live to 80 years old, but no matter how well I take care of myself, disease or an accident can change this. Expectations that are predictable are measurable with the least amount of outside influence. A hospital may expect that Medicare will continue to cover certain patients in the future, but politicians can alter this expectation without notice. Measuring all possible outcomes and aligning these expectations makes the odds of a certain outcome too high. Too many variables create diluted results. The answer again must be specific and not open to interpretation. The outcome to an action must have a yes or no, up or down or left or right solution. If a car is driving towards a brick wall and the driver does not hit their brake, they will hit the wall.

The stock market is a perfect example of a yes or no result. It is either going up or down. The market is either bullish or bearish. Yes or no is the only outcome on whether to buy or sell stocks. For the market to go up it requires more investors to buy rather than sell stocks. Yes or no to stocks and no maybes. This makes the stock markets measurable. When we are measuring the stock market’s expectations, we are not looking fundamentally or technically at individual stocks, instead we measure their expectations. A fundamentally strong stock has a hard time going up in a bear market just as a fundamentally weak stock has a hard time going down in a bull market. This is because the analysts and underlying company who are setting these expectations are influenced by either a bullish sentiment or bearish one. If a market has high expectations, analyst will more likely have loftier goals for weak companies. This is apparent in a bull market when the most volatile stocks outperform the more fundamentally sound ones. When a market has high expectations, the group will push the natural limits of risk. Higher risk equals higher reward. With bearish expectations analysts will sink further and faster than reality and set the stage for another bull market since their expectations are falling faster than profits.

Another good example of a measurable expectation exists in politics. If we ask 100 different people – who are classified as independents and who are not influenced greatly by either party – a yes or no question whether they believe a politician is doing a good job, their answer would paint a good picture of what expectations are for this person. If 55% believe that he or she is doing a good job, than it is fair to say they have high expectations for the politician. Just because these independents have high expectations for this politician does not mean that they are destined to fail, it just means that these independents already expect good things from this politician and they will be harder to please. There is a point, or in this case, where a politician will meet his natural limits and it becomes humanly impossible for him to exceed them. This is the point where this politician has no other direction to go but down since these independents have reached their natural high limit of expectations. To determine this natural limit of a politician we need to study the historic highs and lows in this political arena. Research determines natural limits, not our opinions.

In our personal lives we either get a promotion or not. In relationships we can’t predict whether we will live happily ever after. A relationship could end in divorce, widowed or staying together. In this case we are angry, sad or happy. Three outcomes make this type of personal expectation too difficult to predict. We may be able to predict emotional responses to other missed expectations that could lead to divorce. If I interview for an internal job position and they are making the decision on Friday, I either will get it or not. The primary differences between predictable personal outcomes are the possible results. They must be yes or no, only two outcomes with no other foreseeable variables. There will be random things in life that are unpredictable. It is possible a 1,000 foot tsunami, caused by an asteroid hitting the Atlantic, could wipe most of the east coast of the United States off the map. This type of disaster or wild card cannot be included as a possible outcome since it is highly unlikely. If an actions outcome has less than a one percent chance, then it is fair to not include it as a possible outcome. As mentioned before if we continue to take risks where one of the possible outcomes is zero, then eventually we will end up with zero. We will either love or hate. It may start as like, but our expectations will make it love and then turn to hate. Personal expectation outcomes are purely emotional. Our emotions give us the motivations to push or pull back as a result of exceeding or missing expectations.

5.3 Interpreting Expectations Environment

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