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The Future May Not Resemble the Last 6 Months

Boom-and-bust cycles are largely a function of our collective expectations.

Expectations are very tricky because they are almost always wrong.

But our expectations drive our behaviour anyway.

Our view of the future is the fundamental basis for how we act today.

Since our expectations about the future are regularly based on our recent experience, we act as if the next week, month and year will be just like the last one.

We are programmed that way.

future

In fact it is a genetic trait of humans to base our view of the future (our expectations) on the past; we have very little else to base it on.

But we have very short-term memories, so our natural inclination is to define the past as the very recent past.

Unless we train ourselves differently, we think that what just happened will continue into the foreseeable future, and we will act based on that expectation.

When every house you buy is worth 10 percent more six months later, you start to expect that to continue.

If you expect home values to rise 10 percent every six months, then you buy a bigger house or use your home equity to buy a boat.

Then one day something changes.

When behaviour reaches extremes it does not take much to surprise us. 

One day your neighbours’ house doesn’t sell.

They lower the price, and it still doesn’t sell.

Things have changed.

After awhile, we adjust our expectations and begin to think these declining values will continue into the foreseeable future.

And we start to behave differently based on those expectations.

Of course, that behaviour will eventually reach extremes as well.

These boom-and-bust cycles seem to overshoot what seems rational in hindsight.

Looking back, it is almost always painfully obvious that we allowed our expectations to get out of whack.

The solution is simple but not easy to execute.

We need to train ourselves to lengthen our definition of the past.

That is why history is so important. Confused mind think thought

It has been said that the three most important words in the English language are remember, remember, remember.

So we need to remember those times in our lives when things changed.  

Think of the times when you expected things to happen a certain way based on your recent experience.

You then changed your behaviour to reflect those expectations.

Then, just at the point where that behaviour reached an extreme, something changed and you found yourself wishing you had behaved differently.

I would imagine we will not have to look too far into the past to see examples.

The concern I have is that most of us have already forgotten the very things that would help.



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About

Carl Richards is a Certified Financial Planner and a columnist for the New York Times, Morningstar magazine and Yahoo Finance. He is author of 2 books, The Behavior Gap & The One-Page Financial Plan. Carl lives with his family in Park City, Utah. You can find his work and sign up for his newsletter (which has an international audience) at www.behaviorgap.com/


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