Managerial expectations are the basis for crafting organizational strategies and devising courses of action, yet we have little insight into their origin and nature. In this article, we use a formal model to develop propositions concerning how managers that have given prior beliefs form expectations in the face of a new belief or observation. Our model, which incorporates links among beliefs as ... [Show full abstract] well as belief entrenchment, allows us to uncover archetypical mechanisms that underlie expectation changes. We show the effect that different types of linkages (logical chains), as well as belief entrenchment, have on how expectations are formed and whether they change as a result of adopting a new belief. We also show that when given beliefs are not sufficient to draw conclusions managers need to go beyond their belief system and engage in ''inductive search'', and we discuss how they may do so. Finally we provide explanations why expectations among competing firms within an industry differ and demonstrate how firms may defy conventional industry wisdom. We illustrate our findings with examples.