Fear Of Missing Out

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21 Aug, 2024

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The Fear Of Missing Out, or FOMO, refers to the uneasy belief or thought of losing out on trading, investing, or other money-making opportunities in financial markets or business when studied in the context of finance. The term originated in 2004 on social media platforms in a different context. It is primarily used as internet slang.

FOMO can be observed in other aspects of life, including finance, business, and work. This feeling or emotion usually sets in when traders or investors see others making profits or realizing gains from trading or investing activities while they do not enjoy the same or similar returns. When an individual feels they are missing out on money-making opportunities, they begin following successful people to emulate their success in financial markets, share trading, or business, among other areas.

Fear Of Missing Out (FOMO) Meaning

The Fear Of Missing Out (FOMO) in finance and business is a perception people develop when they think they are losing or have already lost opportunities that others have leveraged and benefitted from.
The expression became popular in 2004 on social media platforms, where people constantly post the best moments of their lives; it was used to describe the feeling of being deprived of the benefits or experiences others enjoy.
The fear of missing out psychology is observed in finance, business, and many other areas. It is commonly observed in financial markets and trading.
FOMO impacts logical reasoning, analytical thinking, and rational behavior.

Fear Of Missing Out In Finance Explained

The Fear Of Missing Out is a feeling of not being able to access the same gains or returns as others operating in financial markets. In the finance domain, this can be dangerous because investors or traders who make decisions based on the analysis conducted by other investors or traders are prone to making costly mistakes. It suggests how people act when they wish to enjoy the same benefits as others who they consider wiser or luckier while trading or investing compared to themselves.

FOMO in finance can have serious, extremely adverse consequences, such as losses due to overtrading, ignoring risk management strategies to follow market trends or successful traders, hampering diversification goals by making excessive investments in stocks of one kind, etc.

In the fear of missing out on trading, most new investors try to follow a trend, copy a reputable investor's portfolio, or invest in stocks simply because someone else is doing it. They may even rely on tips received from entities they believe make judicious investment decisions, which may not necessarily be accurate.

In finance, FOMO is true not only while investing in stock markets but also when making decisions regarding mutual funds, Initial Public Offerings (IPOs), Initial Coin Offerings (ICOs), cryptocurrency, real estate, and other popular or hyped investments or assets.

Causes

The causes of FOMO in finance are enumerated below.

Excessive comparisons with other investors or traders lead to wrong trading or investing decisions as such individuals focus almost entirely on other people’s actions. It can even affect asset management on a large scale if professionals exhibit such behavior.
Past experiences in the form of missed opportunities also result in investors experiencing FOMO and making rash decisions.
Those driven by short-term gains are likely to take undue risks to earn quick profits. This behavior stems from the FOMO arising from not being able to earn significant amounts within a short period like day traders.
Social media or blogs may affect or influence an investor’s decisions regarding investing in certain stocks or assets.
Confirmation bias is another cause of FOMO in financial markets. If an investor believes their market or investment knowledge is absolute, they tend to make illogical decisions.

Effects

The effects of FOMO in finance have been discussed in this section.

In financial markets, a common effect of FOMO is that most people opt for trading instead of investing based on fear of missing out on trading. This is because they look at experienced traders and believe trading is easy.
People wish to copy seasoned investors to build similar portfolios based on the ill-founded assumption that they will be able to earn profits like them.
Due to FOMO, people may begin investing in assets, products, or financial instruments they do not understand. The fear of missing out on crypto is one of the best examples of this kind of investment.
People begin to doubt their investment strategies and do not appreciate their existing investments. They may even exhibit compulsive market behavior and try to expand their risk tolerance.
Fundamental and technical analyses may take a backseat when people emulate others in financial markets.

Examples

Here are two examples to facilitate further discussion.

Example #1

Frank shares an apartment with three friends. All three are traders who make intraday profits or losses in line with the price shift or market dynamics. However, Frank is an investor who invests a fixed amount every month, creating a decent portfolio for his financial needs.

Lately, Frank has been considering trying his hand at day trading. His friends are encouraging him to try it. They have shared a specific tip with him regarding some stocks, telling him how they plan to profit from it.

Now, Frank, who has no information about trading, is intrigued. He begins to experience FOMO as he does not want to be the one without profits from this opportunity. So, like his friends, Frank undertakes the risk and engages in trading.

While the possibility of making profits exists, Frank should not ignore the fact that losses are likelier than profits since he does not know much about trading or stock price movements. Frank undertook trading only because he experienced FOMO when his friends told him they were going to make huge profits soon.

Example #2

In October 2023, XRP and Polygon (MATIC) posted high trading volumes, with traders feverishly engaging in Bitcoin trading out of fear of missing out on crypto. They reached the highest points seen in the last 30 days.

Bitcoin's trading volume crossed $10.37 billion, which has been quite the jump given the performance in previous months. Due to rising FOMO, crypto enthusiasts consistently track price movements and activities in this domain. Despite some fluctuations, XRP still stands at $10.5 billion, and MATIC is worth approximately $400 million.

The fear of missing out sentiment drove the surge. It has generated great interest within the crypto community, with every trader trying to comprehend the record-breaking trading volumes of digital assets.

How To Deal With It?

A few simple ways to deal with the fear of missing out are given below.

When investors and traders understand the differences between their financial positions, risk tolerance levels, and long-term financial goals and those of the people they wish to emulate, rational decisions about investments become possible.
Practicing rational behavior and critical thinking before reaching a conclusion helps make better investment decisions.
A long-term vision based on one’s independent financial requirements can help investors stop themselves from depending on other people’s insights.
Avoiding comparisons pertaining to decisions, experiences, titles, and financial status also enables investors to make independent decisions.
Using social media to one’s advantage without being heavily influenced is crucial for preventing feelings of FOMO from cropping up. Investors who take the time to analyze a situation typically make wise and calculated decisions.

Frequently Asked Questions (FAQs)

1. Does life insurance result in the fear of missing out?

Life insurance is not a product usually associated with FOMO in finance. While it is possible for people to think they need more coverage or better premiums, life insurance does not typically cause FOMO because protection (in case of disability or death) is the primary intention of purchasing life insurance policies. Hence, life insurance does not invoke the same feelings as investments or assets.

2. What is the fear of missing out in the context of risk management?

FOMO in risk management refers to the emotion triggered by unnoticed or missed opportunities for risk reduction or the chance to capitalize upon and benefit from certain risks. For such individuals, timing the market becomes a priority. Due to this, people may make hasty decisions or delay making decisions about important matters.

3. How is the fear of missing out in finance measured?

Measuring FOMO in finance is tough because the phenomenon is psychological and, therefore, not easily quantifiable. However, some metrics are losses incurred due to irrational trading behavior, the quantum of trading volume, erratic short-term trading trends, etc. Surveys or research carried out under the branch of behavioral finance can help quantify FOMO to some extent.