Monday, May 04, 2009

What We Expect Shapes What We Do

What We Expect Shapes What We Do

The daily fluctuations in the marketplace only reinforce our feelings of uncertainty of what's real and what to expect. Is it a bull market or a bear market rally? If you listen to CNBC daily as I do, you're not alone in being perplexed as to how to answer that question.

Today the CNBC pundits had to admit that they believed there was a general feeling that things were looking rosier and more optimistic. As one of them stated "there is just something in the air that feels different". He followed his statement pondering the chicken and egg issue.

Psychologists ponder cause and effect all of the time--trying to look retrospectively about why a certain phenomenon exists. We look at events in time and try to link stimulus and response or cause and effect. We also look at trends, norms, habits and acknowledge the power of reinforcement over time for why they stick around.

What we know is that we're all driven and motivated by reward. The more we're rewarded for a particular behavior or attitude, the more likely we'll repeat it. So it makes sense that Americans are clinging to any good news and feeling like life will be a lot rosier.

Just think about how Americans have been conditioned to bounce back, to believe that economic times will be better. We have lived in these extraordinary times of prosperity and optimism--at least in terms of wealth and the ability for the average American to have a piece of the good life.

In retrospect, reality becomes a lot more clear as consumers can see that these perceptions were not based on reality but perceived subjective reality--or what they wanted to believe. So what are we to believe about what we see today to explain what's really driving the marketplace's upturn--valid reasons for being optimistic or the subjective yearning for feeling optimistic or wanting it to be true?

Why does it matter? If we look at today in perspective of a broader and longer-term view, it becomes more critical that we really understand what accounts for the expectations and how valid they are.

We can all be optimistic. As Warren Buffet said today "How can we bet against Americans? It doesn't make sense that our economy won't come back. But he put that into a longer-term perspective. He was optimistic that future generations will have even better lives than we know today.

So, we're reinforced to cling to our enthusiasm and positive perceptions for our future prosperity. That's a good thing as long as people can afford that perception. It backfires in the short-term because it is often used as a rationale to avoid making tough choices that all will be OK. However, if they use it as a rationale to defend their current unrealistic and unreasonable actions just because they're more rewarding then they are only postponing the inevitable.

I'm stunned by the multitude of people that I meet who refuse to perceive this truth as reality. They still cling to what was true before this bust. They are still holding on to real estate purchases that no longer make economic sense rationalizing that they'll double their investments. They won't give up their short-term rewards to assure their future financial well-being. Obviously, this is a short-sighted and unrealistic strategy.

On a positive note, I've also met many people who got the wake-up call and took the action to make radical changes. The ability to listen and take information and advice to heart is a key difference. Education has a lot to do with it--self-education.

No comments:

Post a Comment