Exaggerated expectation is a more extreme version of confirmation bias (interpreting information in such a way that it confirms a preconception). The reality, when compared to real-world evidence, turns out to be less severe or extreme than the expectations. One of the causes of this is a basic anxiety that causes a tendency to exaggerate information and expectations.
An example would be worrying about an upcoming public talk you are required to give. You go over it again and again, picturing the worse case scenarios that could play out. You are exaggerating the expectations of the event – in reality the speech goes well and nothing extreme happens whatsoever.