FOMO

FOMO — fear of missing out — is the anxiety experienced when you see others profiting from an investment you do not own or have exited. This fear drives you to buy late, after much of the gain is already captured, and to hold through crashes because exiting means admitting you missed the main move. FOMO is a primary driver of bubbles and a primary destroyer of retail investor wealth.

The mechanism of FOMO

FOMO is driven by two forces:

Regret aversion. You sold a stock at $50, and it has now risen to $100. The regret is intense. You “left money on the table.” To escape this regret, you buy back in at $90, hoping to capture the remaining upside. But you are buying late, after most of the move is done.

Social comparison. Your brother bought cryptocurrency and is up 300%. You feel foolish for not having done the same. To escape this feeling, you buy in, not because your analysis supports it, but because you cannot bear to be left behind.

FOMO in market cycles

FOMO is most intense at market peaks, when recent gains have been largest and the herd’s enthusiasm is highest. This is precisely when the risk is greatest.

During the dot-com bubble, FOMO drove retail investors to pile into any stock with “.com” in the name. The gains had already happened; FOMO was catching the back end of the move. When the bubble burst, these late arrivals lost the most.

In 2017-2018, cryptocurrency experienced a similar FOMO cycle. Prices exploded, media coverage was everywhere, and late entrants bought in at $15,000 (for Bitcoin). The phrase “HODL” (hold on for dear life) became popular, with investors trying to convince themselves and each other not to sell. When the bubble burst, many rode it all the way down.

FOMO and timing

FOMO destroys timing. A disciplined investor might have planned to enter a market after a decline or at a specific valuation. But FOMO pulls her in early, after the move is already large. She buys high.

Then, when the decline comes, she holds (or buys more) out of the same FOMO that got her in. She holds through the crash, selling only near the bottom when regret is unbearable. This buy-high-sell-low sequence is often entirely driven by FOMO.

FOMO and overconfidence bias

FOMO pairs dangerously with overconfidence bias. An overconfident investor believes she has insight or timing ability. FOMO provides the urgency to act on this overconfidence. Together, they create aggressive late-cycle buying.

FOMO in social media age

Social media has amplified FOMO. Before the internet, missing a stock market move felt bad. Now, seeing (constantly) that your friend is up 50% while you are flat creates inescapable FOMO. The frequency and visibility of others’ gains has increased.

Cryptocurrency and meme stocks (like GameStop and AMC) exploded partly due to social media FOMO. Discord channels and Twitter would light up with gains screenshots, driving waves of new retail money in.

Distinguishing FOMO from regret aversion

FOMO is fear of missing out on gains others have already made. Regret aversion is fear of regretted decisions more broadly. They overlap but are distinct. Regret aversion can drive you to hold a loser (fear of regretting the sale); FOMO drives you to buy a winner (fear of missing the gains).

Defending against FOMO

• Plan before the move. Before entering any investment, write your thesis and your entry/exit criteria. When FOMO hits, follow the plan, do not abandon it.
• Track your regrets. Keep a journal of investments you missed out on. Calculate: if you had bought at the peak FOMO moment, what would your return be? You will find it is usually negative. This reality check reduces FOMO.
• Focus on absolute returns, not relative. Your goal is a good long-term return, not to match your brother’s return or beat your friend’s stock picks. Relative comparison is the fuel for FOMO; absolute goal focus is the cure.
• Avoid social media during rallies. Instagram, Twitter, and Discord are FOMO amplifiers. During strong market runs, their signal-to-noise ratio is terrible. Mute them.
• Use dollar-cost averaging. If you are determined to enter an investment, do it gradually over months, not in one lump sum driven by FOMO. DCA reduces the risk of buying at the peak.
• Remember: peaks are always called bull markets, not crashes. At the peak of the dot-com bubble, the phrase was “this time it is different” and “the internet changed everything.” Extreme optimism is a sign of FOMO, not insight.

See also