"The self-fulfilling prophecy occurs when teachers or leaders believe, or act as if they believe, that a randomly selected subset of students or employees will perform better in contrast to some average or unknown group. But research done in the Israeli Defense Forces shows that Pygmalion effects can be created without inducing contrasts between high and low performers. When platoon leaders at training camps were convinced that all of the soldiers in their classes had unusually high command potential, there was still a strong Pygmalion effect. This suggests that overall performance of a group can be increased when leaders expect everyone to do well. There is apparently no need to sort people into subgroups of high-status "winners" and low-status "losers" in order to use the power of the self-fulfilling prophecy as a way to enhance performance."

"That's a good thing, because self-fulfilling prophecies are just as powerful in their effects in the opposite direction. When a leader believes that a person lacks skill or motivation, these negative expectations decrease performance. The effects of negative self-fulfilling prophecies help explain why, over the long term, internal competition can hamper performance. Once a person, group, or division is labeled a loser, research suggests that subsequent performance will be worse because leaders and others will unwittingly act to fulfill the poor performance expectations. And the loss of self-worth and motivation felt by those who are treated as losers leads to further decreases in their performance."

Source: Taken From Stanford GSB News

http://www.gsb.stanford.edu/news/research/ob_knowing.shtml. Paragraph 6-7, 06/09/2010.

Also, please follow this video for better understanding of the pygmalion effect:

http://www.youtube.com/watch?v=9Wl_MZc1cTU