The FOMO effect: the fear of missing out on an investment opportunity

The FOMO effect: the fear of missing out on an investment opportunity

Communications

Fueled by social media, FOMO is a negative feeling that can lead to heavy losses for investors who jump on the bandwagon for fear of missing out on an opportunity.

On a chilly morning in February 2023, when the sun had not yet risen, a line began to form at the gates of the Bank of Spain, in the middle of Cibeles Square in downtown Madrid. And far from being a one-off event, this long line of small savers has formed every time there is a Treasury Bill auction during the year. These savers do not want to take risks and are instead drawn to the stability of fixed-income yields in the heat of rising interest rates. Many see others around them hopping on the trend and are afraid of not getting their piece of the investment pie.

This situation is brought about by feelings of envy, the desire to win and a fear of being left out of something that represents a great opportunity. The phenomenon has even been given a name, and is commonly referred to as: FOMO, short for Fear Of Missing Out. Do you regret not getting into bitcoin? Do you think you should have bought tech stocks last year after the sharp correction in the growth industry and its subsequent recovery in early 2023?

Financial FOMO: what is it?

The origins of the concept are unclear. Some attribute it to a marketing expert by the name of Dan Herman, who preempted the idea in 1996. While others credit the term to US Harvard student, now turned entrepreneur and venture capitalist, Patrick J. McGinnis. Be that as it may, this concept represents a “pervasive apprehension that others might be having rewarding experiences from which one is absent,” as defined by British psychologists. In other words, the feeling of fear or panic that comes from thinking that we are missing out on something good.

The world of medicine has extensively studied how FOMO affects people’s health, especially in young people, and it has been classified as a form of social anxiety caused by the fear of missing out on experiences that others are enjoying and therefore not being able to share them. Nowadays, in the age of social media, this syndrome has increased with people who believe that they must be connected to their smartphones all day long in case something interesting happens. 

It is the fear of missing out on every minute of the lives of friends and even strangers on TikTok, Instagram or Meta. Or of not being able to share moments of your own, not going to that concert your friend went to, not buying the latest smartphone as soon as it comes out, or missing an opportunity to make your savings work for you

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How to combat FOMO in investments

In the world of finance, FOMO can end up causing numerous losses. A case in point is the dot-com bubble, which refers to the period between the late 1990s and the beginning of the 21st century when many investors bought shares in internet-based companies, attracted by the euphoria surrounding the rapid growth of valuations that these companies were experiencing day by day. Those who bought high had to contend with severe financial losses the day the bubble burst. 

One of the keys to avoiding this feeling has to do with information overload. Do not be blinded by news headlines or posts on social media shared by anonymous profiles or people who lack experience in the investment world. 

When it comes to matters of the pocketbook, you should turn to a financial advisor, who is a professional that is trained to help savers make informed financial decisions, weighing up the pros and cons through proper financial planning.

It is also essential to be disciplined and maintain the same investment strategy while pursuing set goals. Of course, we must not pay attention to fads or the herd effect (investors who buy and sell assets when they see others doing so). This cognitive bias has been studied in behavioral economics by Nobel Prize winner in Economics (2017) Richard Thaler, who defines this concept as “peer pressure, the desire not to face disapproval […] If everyone else accepts a certain proposition or sees things in a certain way, one would assume that they are surely right”. 

By way of a moral, investor Warren Buffett once said: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”