On 31 January 2006, Google announced its financial results for the final quarter of 2005. The numbers were nothing short of phenomenal. Revenue surged by 97%, and net profit soared by 82%. It was a record-breaking quarter, an achievement few could have predicted. Yet, the stock market’s reaction to these stellar figures was astonishing. Within seconds, shares tumbled by 16%. Trading was halted, only for the stock to plunge another 15% when it resumed. Absolute panic swept through the markets. In the depths of despair, one particularly desperate trader even took to his blog to ask: “What’s the best skyscraper to throw me off?”
What went wrong? How could such positive news lead to such catastrophic results? The answer lies in one simple yet powerful word: expectations. Wall Street analysts had predicted even better results. When those expectations weren’t met, $20 billion vanished from Google’s value in mere moments.
The Perils of Expectations in Business
Expectations in the business world, especially in financial forecasting, can often be a double-edged sword. While companies and analysts try to predict the future based on available data, they are ultimately guessing—albeit educated guesses. The story of Google’s financial results in 2006 is an important case study of how Wall Street’s expectations can drive stock market behavior, sometimes illogical or irrational.
When Google reported an extraordinary 97% increase in revenue and an 82% increase in net profit, the company’s results far exceeded the typical growth rates expected by even the most optimistic investors. However, the immediate market reaction to these positive figures was catastrophic. Google’s stock dropped by 16% within seconds, and a further 15% plunge followed once trading resumed. The market’s reaction was fueled not by the company’s performance but by the fact that the earnings results failed to surpass Wall Street analysts’ forecasts, which were arguably too optimistic. Analysts and investors had anticipated an even more explosive performance and the disappointment from falling short of these high expectations created mass panic. Google’s stock lost $20 billion in value as a result.
This situation highlights the extreme volatility that can arise from expectations in the financial markets. When analysts set overly ambitious targets, the company’s performance can become secondary to the perceived “failure” to meet these expectations. In the case of Juniper Networks, the gap between actual earnings per share and analysts’ forecasts was a mere tenth of a cent, but it was enough to cause the stock to drop by 21%, leading to a $2.5 billion loss in market value. The discrepancy between expectations and reality often generates an overreaction, where stock prices fluctuate violently in response to any failure to meet forecasted numbers, no matter how minor.
This phenomenon also points to a broader issue in corporate management. Companies, desperate to avoid such massive punishments in the market, often feel compelled to align their performance with analysts’ expectations, even if those expectations are not grounded in the company’s true potential. This has led to the widespread practice of “earnings guidance,” where companies publish their forecasts to control the narrative. However, this often backfires, as investors and analysts scrutinize these internal forecasts more carefully, expecting them to be met to the letter. In some cases, this can lead to the manipulation of financial results through accounting tricks or short-term strategies, which ultimately undermine long-term business health.
The perpetual cycle of inflated expectations and market punishment often makes companies fixate on short-term goals, disregarding long-term stability in favor of meeting analysts’ forecasts. This has created a culture in which financial performance is divorced from a company’s health, leading to a “market schizophrenia” where outcomes are determined less by reality and more by what others expect. This pressure to meet expectations can distort business decisions, pushing companies to make concessions and undermining their long-term objectives.
The Positive Side of Expectations: Unleashing Potential
Expectations are not always detrimental. While they can sometimes be overwhelming or lead to disastrous outcomes in the business world, expectations can also serve as a powerful catalyst for success. The Pygmalion Effect best demonstrates this idea, which describes how positive expectations can shape behavior and outcomes in ways that encourage individuals to reach their potential.
The Pygmalion Effect is named after a famous 1965 experiment by American psychologist Robert Rosenthal, which showed how teachers’ expectations can dramatically influence student performance. Rosenthal’s study involved telling teachers that a certain group of students was on the brink of an intellectual breakthrough. These students, dubbed “bloomers,” were selected randomly, but the teachers were unaware. The teachers believed that these students had exceptional potential and treated them accordingly. As a result, the students’ academic performance improved significantly over the year, far outpacing their peers. The teachers’ expectations were so powerful that they influenced the students’ academic abilities and overall personalities and behaviors.
This effect is a prime example of how expectations can shape reality. The teachers’ subconscious belief that certain students were capable of brilliance led them to spend more time with those students, offer encouragement, and invest additional effort in helping them succeed. This, in turn, caused the students to perform better and, in some cases, exhibit more confidence and improved social behaviors. In a sense, the teachers’ expectations helped create the very qualities they anticipated, proving that expectations can generate self-fulfilling prophecies in some cases.
The power of expectations is not limited to the classroom. This same principle can be applied in professional environments where leaders, managers, and mentors can foster a culture of high expectations to inspire growth and development. When leaders expect great things from their teams, those teams are more likely to rise to the occasion and exceed their goals. Expecting greatness from others gives them a sense of purpose and motivation, as it signals that someone believes in their potential. Conversely, if no one expects anything from them, people may become complacent, unable to reach their full potential. When accompanied by support and belief in one’s abilities, high expectations can propel people to achieve more than they thought possible.
However, it’s important to note that expectations must be rooted in realism and authenticity. Unrealistically high expectations can set people up for failure, leading to stress, burnout, and frustration. Leaders must balance challenging their teams and setting achievable, reasonable goals. When expectations are grounded in a genuine belief in others’ potential, they can become a source of empowerment and success.
Expectations at a Personal Level: The Placebo Effect
The impact of expectations goes beyond business and education—it extends into our health and personal well-being, as seen in the placebo effect. The placebo effect is one of the most compelling demonstrations of how expectations can alter our physical reality. In medical studies, patients often experience real improvements in their symptoms despite being given a treatment with no active ingredients. This phenomenon highlights the mind-body connection and shows that our expectations can directly influence physical health.
The placebo effect occurs when individuals believe they are receiving an effective treatment, even though it is inactive. These beliefs trigger biochemical changes in the brain that result in measurable improvements in health. The mechanism behind the placebo effect is still not entirely understood, but research suggests that it is linked to the brain’s reward system. When we expect a positive outcome, our brain releases endorphins and other neurochemicals that can reduce pain, improve mood, and promote healing. Sometimes, patients experience significant improvements in their condition simply because they expect the treatment to work, even if it is a sugar pill or a saline injection.
What is truly remarkable about the placebo effect is that it works even when patients are aware they are receiving a placebo. In clinical trials, patients are sometimes informed that they are taking an inert substance, and yet they still report improvements in their symptoms. This demonstrates the power of belief and expectation in shaping our experiences. The placebo effect underscores the idea that our mental state can profoundly impact our physical state. When we believe that something will work, our body often responds accordingly.
However, the placebo effect has limitations. For instance, Alzheimer’s patients, whose brains are damaged in areas that process expectations, do not experience the same benefits from placebo treatments. This shows that the placebo effect relies on the brain’s ability to process and act upon expectations. In individuals with cognitive impairments, the brain’s response to placebo treatments is compromised, thus limiting the effect’s power.
The placebo effect is a stark reminder of how expectations shape our experiences and outcomes in ways we may not fully understand. Harnessing the power of expectation can improve our mental and physical health, but only when our expectations are aligned with the potential for positive change. The placebo effect also illustrates the importance of managing our mental states, as cultivating positive expectations can be a valuable tool in achieving better health and well-being.
Living with Expectations: Can We Free Ourselves from Them?
Despite the undeniable power of expectations, believing that we can completely free ourselves from them is unrealistic. Expectations are an inherent part of the human experience, shaping how we perceive ourselves, others, and the world around us. From childhood, we are taught to set goals, pursue aspirations, and work toward personal and professional growth. But while expectations are impossible to eliminate, we can learn to manage and adjust them in a way that allows us to navigate life with greater resilience and self-awareness.
One way to deal with expectations is to raise them in areas we control, such as personal development, career goals, and relationships. When we set high expectations for ourselves, we challenge ourselves to grow and push beyond our comfort zones. For example, if you expect to become a better writer, you are more likely to dedicate time to writing and honing your craft. If you expect greatness from your team or colleagues, you will likely provide them with the resources and support they need to succeed. High expectations can motivate, providing a sense of purpose and direction.
However, tempering expectations regarding things outside our control is equally important. The stock market, for example, is inherently volatile and unpredictable, and setting unrealistic expectations for consistent gains is a recipe for disappointment. By lowering expectations for external factors that we cannot influence, we can shield ourselves from unnecessary stress and frustration. This doesn’t mean abandoning ambition or giving up on goals—it means recognizing that some things are beyond our control and preparing ourselves mentally for the inevitable setbacks.
The key to managing expectations lies in balance. High personal growth and success expectations can inspire us to reach new heights, but they should be realistic and achievable. Unrealistically high expectations can lead to burnout, anxiety, and a sense of failure. Similarly, lowering expectations for things outside our control can protect us from disappointment but should not lead to complacency or apathy. By adopting a more mindful approach to expectations, we can navigate the complexities of life with greater clarity, resilience, and peace of mind.
Conclusion: The Double-Edged Sword of Expectations
Expectations are not inherently good or bad. They are a powerful force that can either motivate or demoralize, build up or tear down. In business, they can drive success or lead to catastrophic failure. In our personal lives, they can be the key to unlocking our potential or the source of profound disappointment. By managing expectations wisely—raising them where we can control the outcome and lowering them where we cannot—we can navigate the complexities of life with greater resilience and perspective.
Expectations shape our reality, and by understanding their impact, we can learn to harness their power to our advantage.
This article is part of The Art of Thinking Clearly Series based on Rolf Dobelli’s book.