Week 36 Day 2: FOMO: The Fear of Missing Out on Gains

Your coworker made $50,000 on a meme stock in two weeks. You feel left out. You feel like you LOST $50,000 (even though you did not). This is FOMO triggering loss aversion: missing out on a gain feels like a loss, which activates the 2:1 pain ratio. So you buy the stock -- at the peak -- just as the coworker is selling.

FOMO triggers in the modern era: (1) Social media. Every crypto millionaire posts their gains. Nobody posts their losses. Your feed is 100% winners, creating the illusion that everyone is getting rich except you. (2) Group chats and forums. Reddit's WallStreetBets, crypto Discord servers, and investment Slack channels create echo chambers where FOMO is amplified by social proof. 'Everyone in the group is buying; I should too.' (3) Financial media. CNBC broadcasts the day's biggest winners. 'Stock X is up 200%!' creates urgent FOMO in viewers. They never follow up with 'Stock X is now down 80% from its peak.' (4) Cocktail party indicators. When people at parties are talking about their stock picks, the market is near a peak. When nobody mentions investing, the market is near a bottom (because everyone is too embarrassed to discuss their losses). FOMO antidotes: (a) Remember that you see a biased sample. For every person who posts a 500% gain, hundreds lost 50% and said nothing. (b) Calculate the risk-adjusted return. A 500% gain that had a 90% chance of losing everything is a terrible bet in expectation. (c) Ask: 'Would I invest in this if nobody else was talking about it?' If the answer is no, the urge is FOMO, not analysis. (d) Stick to your plan. Your automated VTI contributions are earning a quiet, reliable 10% per year. That is excellent. It just does not make for exciting social media posts.

FOMO in financial contexts is explained by the 'keeping up with the Joneses' utility framework (Abel, 1990; Campbell and Cochrane, 1999): investors derive utility not only from their absolute wealth but from their relative wealth compared to a reference group. When peers achieve high returns, the investor's reference point shifts upward, making their own (unchanged) returns feel like a loss. This relative wealth model generates excess volatility (investors chase assets to maintain relative position), momentum (buying pressure from FOMO accelerates existing trends), and predictable reversals (when FOMO-driven prices overshoot fundamentals). Hong and Stein (1999) modeled the interaction between informed investors (who trade on fundamentals) and momentum investors (who trade on past price trends, driven by FOMO): the gradual diffusion of information creates underreaction (slow incorporation of fundamentals), which momentum investors amplify into overreaction (FOMO-driven price overshoots), followed by eventual reversal. Baker and Wurgler (2006) developed an investor sentiment index that captures aggregate FOMO (measured by IPO volume, first-day IPO returns, equity share of new issuance, and other indicators) and showed that high sentiment predicts low subsequent returns: stocks are most expensive (and worst to buy) precisely when FOMO is highest. The practical rule: when social media, parties, and mainstream media are all discussing investment opportunities, sentiment is elevated and expected returns are low. When nobody wants to discuss investing, sentiment is depressed and expected returns are high.