Expectations, Expectations, Expectations…
One of my college professors once told me that the one most important thing one should know about monetary economics is the word: expectations. Expectations apparently drives everything and countries can rise (or crumble) based on people’s opinion. Sounds implausible? Think again.
I guess that it is really during this tremulous period that the true effect of market expectations can be seen. The Dow, S&P 500 and NASDAQ plunged again today, just like as they have for the past few months. According to the WSJ , the drop was due to “worries about economic growth.” While I’m no genius, I’ve known for quite some time that the U.S. economy hasn’t been in the best the shape. So what was the reason for the drop? The simple concept of “Expectations”. People (investors in this case) fear that the economy is in tatters and expect it to remain that way. They then trigger a sell-off by selling the stocks they own, driving the stock prices down, and effectively, cause the major indices to drop. This drop then affects other people, who start panicking and selling, effectively causing the light drop to become a free fall There you have it: a self-fulfilling prophecy. It really is a fascinating concept, but one which most people would be unable to appreciate in these dire circumstances
Expectations can be seen everywhere, and not just the macro level. Take a small bank for example. Imagine that a rumor gets started that the bank was in a crisis (even if it actually wasn’t), and that people would lose all their savings. What happens next is a bank run, in which everyone “runs” to the bank to try to recover as much of their savings. The bank, facing a sudden escalation in demand for cash, finds itself short of cash as it had given out loans. It is then forced to close simply because customers “expected” it to, rather than due to any actual problems of its own. This is just another example of the role expectations can play in people’s lives.
So the next time you see someone believing that he was meant to do great things, don’t rebuke him. For all you know, he really could become great. I think it’s about time that we all started believing in something and expecting the best out of any situation. I’m sure that it would do us a world of good.
