The FOMO effect: fear of missing out on an investment 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. It was a sight of long queues of small savers that has become a common occurrence throughout the fiscal year whenever there is a Treasury bill auction. They are savers who do not want risks and who are attracted by the recovery of fixed income yields in the wake of interest rate increases. Many see others around them hopping on the trend and are afraid of not getting their piece of the investment pie.

This scene embodies feelings that oscillate between envy, the drive to profit, and the fear of missing out on what may be a grand opportunity. The phenomenon has even been given a name, and is commonly referred to as: FOMO, which stands for Fear Of Missing Out. Do you regret not having got into bitcoin? Do you think you should have bought tech stocks last year after the sharp correction in the growth sector and their subsequent recovery in early 2023?

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. Regardless of its beginnings, this concept is defined by British psychologists as "the pervasive apprehension that others might be having rewarding experiences from which one is absent". In other words, the feeling of fear or panic that comes from thinking that we are missing out on something good.

The medical community has extensively researched the impact of FOMO on health, particularly among the youth, classifying it as a form of social anxiety. This anxiety stems from the fear of missing out on experiences that others are enjoying and consequently being unable to share. In today's social media era, this syndrome has intensified with individuals feeling the need to stay glued to their smartphones all day to see if anything interesting happens. FOMO is about fearing to miss every moment of the lives of friends and strangers on TikTok, Instagram, or Meta. Or the regret of not sharing one's moments, not attending that concert your brother-in-law went to, not being one of the first to buy the latest smartphone model, or missing an opportunity to make savings profitable.

In the financial world, the FOMO effect can lead to substantial losses. Take, for example, the dot-com bubble, where many investors, attracted by the daily increase in the value of internet-related companies, purchased stocks at the height of the market between the late 1990s and the early 21st century. Those who bought high had to contend with severe financial losses the day the bubble burst.

One way to combat this sentiment relates to the overload of information. 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 financial wellbeing is at stake, seek advice from a financial advisor—qualified professionals equipped to guide savers through reasoned financial decisions by weighing the pros and cons within the framework of sound financial planning. 

It is also essential to be disciplined and maintain the same investment strategy while pursuing set goals. Naturally, ignore passing trends or the herd mentality (investors who buy and sell assets simply because they see others doing the same). This cognitive bias was explored in behavioral economics by the Nobel laureate in Economics (2017) Richard Thaler, who describes this concept as "social pressure, the desire to avoid criticism [...] If everyone else endorses a particular proposition or sees things in a certain way, it might be assumed that they are probably right".  

And to conclude with a lesson, consider this well-known advice from investor Warren Buffett: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”