Behavioral psychologists have long understood that the happiness of individuals is not much related whether things are going going objectively well. Instead, it’s much more important that things go surprisingly well. In short, lower expectations are the key to happiness.
As Robb B. Rutledge wrote in a 2014 research article published at PNAS :
…momentary happiness is a state that reflects not how well things are going but instead whether things are going better than expected.A computational and neural model of happiness
Robb B. Rutledge, Nikolina Skandali, Peter Dayan, Raymond J. Dolan
Proceedings of the National Academy of Sciences Aug 2014, 201407535; DOI:10.1073/pnas.1407535111
In fact, many common “risk aversion” questionnaires do a poor job at helping investors because they ignore the powerful force that “disappointment aversion” plays in determining behavior.
Why Expectations Matter
When I work with clients I spend a lot of effort making sure we are using realistic – not overly optimistic – expectations about things like future returns, expected retirement income, etc. Your completed financial plan works best FOR YOU when you can see it all. What can go the way we expect what can go better than we expect, and what can go worse than we expect?
Because shit happens.
A good financial plan lays out not just the best case but also the base case and a worse case. And it tells you what to do whichever way things shake out.
So, What Can We Do?
- Let’s use reasonable expectations for future returns of stocks and bonds. Hint: they’re probably lower than some people will guess.
- Let’s define success not as “beating the market” but as “doing what’s important to you”.
- Let’s design a plan that makes small changes with regularity rather than large shocks unpredictably.
- Let’s use strategies that allow us to employ safety where it counts. We’ll take risk only where it can pay off.
There’s a role for high expectations, of course, but primarily around things you can control.
If you want to get bigger and encourage others to get bigger, cultivate high expectations even if it means being disappointed or sounding non-compassionate, and if you want to feel big enough already and satisfied with what others deliver, lower your expectations.Jeremy Sherman, Ph.D. Psychology Today.
It’s okay to have high expectations for yourself if you’re trying to break bad habits (like spending too much) or start new habits (like building up your emergency fund or pay down expensive loans).