What is a Self-Fulfilling Prophecy?
A self-fulfilling prophecy is an expectation – positive or negative – about something or someone that can affect a person’s behavior in a way that leads those expectations to become a reality. For example, if investors think the stock market will crash, they will buy fewer stocks, prices will start to decline, and the market will actually crash.
Self-Fulfilling Prophecy Example
To make it more easily understandable, consider the following example.
Suppose there is an expectation that a local real estate market will depreciate. As there is a widespread expectation of depreciation, a significant number of homeowners decide to sell their properties. The substantial increase in the number of property sellers creates excess supply in the market. The oversupply depreciates the real estate market, fulfilling the depreciation expectation.
The expectation of a depreciating market, indirectly, was the cause of the market’s price dropping, characterizing it as a self-fulfilling prophecy.
Origins of the Concept
Examples of self-fulfilling prophecy can be found in literature linked back to ancient India and Greece; however, the term wasn’t talked about in its most modern form until the 20th century, when, in 1948, sociologist Robert K. Merton trademarked and described the term in greater depth.
According to Merton, a self-fulfilling prophecy is, in the beginning, a false view or concept of a person, place, or thing. The false definition leads an individual or individuals to act in such a way that the formerly-false idea is proven to be true.
Merton was saying that people’s beliefs and ideas – whether right or wrong – deeply impact the way they think and lead them to act in a way that forces the conceptions to become a reality.
Self-Fulfilling Prophecy in the New Age
New-agers often refer to a self-fulfilling prophecy as the Law of Attraction. Essentially, it is a somewhat mystical or idealized concept that a person gets back what they put out into the universe.
A good example is a child who recently moved to a new school. If the child believes that he or she is awkward, unlikeable, or unpopular, they may also believe that they won’t be able to make any friends or that no one will be willing to sit with them during lunch. The strongly-held beliefs – whether they are initially true or not – affect the way the child acts when he or she enters the lunchroom. This may evoke an awkwardness or shyness in the child’s behavior that may not otherwise be apparent.
The evoked behavior, then, will likely lead the other children in the lunchroom to remain standoffish and prevent them from approaching the new child and/or sitting with them at lunch. In such a scenario, the new child inevitably fulfills his or her own prophecy of how the other children would treat them.
Benefits of Self-Fulfilling Prophecy
Using a self-fulfilling prophecy can be beneficial when applied appropriately, especially in the world of business. If an individual, for example, an entrepreneur, is taking a meeting with potential investors for a startup he’s working on, then winning the investors over is the goal. If the entrepreneur believes that the investors will love his ideas and want to invest in his startup, it will likely lead him to have more confidence in himself and his presentation.
Walking into the meeting with confidence helps the entrepreneur stay grounded, give a great presentation, and be less awkward when talking to the investors one-on-one. In the end, this confidence affects how the entrepreneur carries himself and how the investors see him. In many cases, this can lead the investors to provide the entrepreneur with financing for his startup.
A self-fulfilling prophecy is any held belief or expectation that leads to behaviors that ultimately prove the belief or expectation true. When used positively, this phenomenon can be a great tool in the business world.
Negative Effects in Investing
The self-fulfilling prophecy phenomenon is often mentioned in the arena of investing, and usually in a negative way. Traders speak of bad – that is, erroneous – attitudes about the market that often become self-fulfilling prophecies. For example, if a trader believes that the market is “out to get him” – that is, actively working to make his trades unprofitable – then they will often make trading decisions based on the false scenario. Since the trader’s decisions are based on a false premise, they quite naturally are likely to lead to trading losses.
When the trading losses occur, it further reinforces the truth of the trader’s false assumption in their mind. But the fact is that it is the trader’s own behavior, not any underhanded machinations on the part of the market, that leads to the trading losses. Without recognizing the self-fulfilling prophecy nature of their actions, traders continue to believe their false assumptions about the market and, therefore, continue to have bad experiences because of their own actions that lead to self-fulfilling prophecies.
We hope you enjoyed reading CFI’s explanation of a self-fulfilling prophecy. CFI is the official provider of the global Financial Modeling & Valuation Analyst certification program, designed to help anyone become a world-class financial analyst. The following CFI resources will be helpful in furthering your financial education: