Fear of Missing out (FOMO): A study in behavioural finance

Richard Irwin |

Behavioural finance is the study of how people make financial decisions. It combines psychology and economics to better understand the psychological biases and heuristics that influence our financial behaviour. One of the most prevalent biases in modern times is the fear of missing out (FOMO). In this article, we will explore the concept of FOMO in the context of behavioural finance and how it affects our financial decisions.

FOMO is a psychological phenomenon that describes the anxiety people feel when they believe that others are having a rewarding experience without them. In the context of finance, FOMO arises when people feel the pressure to invest in an asset or a stock because they fear missing out on potential gains. This fear is often heightened by social media, where people see others making huge profits and fear that they will be left behind if they do not act fast.

FOMO can have a significant impact on our financial behaviour. It can lead to impulsive and irrational investment decisions, such as buying into a stock or cryptocurrency that has seen a sudden surge in value. Such investments are often made without conducting proper due diligence, which can result in significant losses.

FOMO can also lead people to engage in herd behaviour, where they follow the crowd rather than conducting their own research and analysis. This herd mentality can create bubbles in the market, where assets become overvalued due to high demand. When the bubble eventually bursts, many investors suffer significant losses.

To overcome the negative effects of FOMO, it is essential to develop a sound investment strategy that is based on one's financial goals, risk tolerance, and investment horizon. This strategy should be developed with the help of a financial advisor who can provide unbiased advice and help avoid emotionally driven investment decisions.

Another way to counteract the negative effects of FOMO is to avoid checking investment portfolios too frequently. Obsessively checking stock prices can lead to overreaction to short-term price fluctuations, which can cause unnecessary anxiety and poor investment decisions.

Finally, it is crucial to remember that investing is a long-term game. It requires patience, discipline, and a level head. Successful investors understand that short-term market volatility and hype should not drive their investment decisions.

In conclusion, FOMO is a common phenomenon in today's interconnected world, where social media and 24/7 news cycles can create a sense of urgency and pressure to invest. By understanding the psychological biases that drive FOMO and developing a sound investment strategy based on long-term goals and sound financial advice, investors can avoid making irrational investment decisions that can result in significant losses. Remember, investing is a marathon, not a sprint, and the key to success is discipline and patience. -Chat GPT