FOMO and discipline: the psychology that moves markets
FOMO — the fear of missing out — pushes investors to buy what the crowd is hyping instead of following their own plan. Why the brain falls for it, what it costs, and the boring habits that stop it.
What FOMO actually is
FOMO, or the fear of missing out, means making quick decisions based on what others are buying instead of your own goals. It is not the fear of losing money. It is the anxiety that other people are benefiting from an opportunity while you are not.
Social media is the accelerant. Seeing people celebrate gains on Reddit or TikTok can spark the fear that a great opportunity is passing you by, and many act on that fear before doing any research. An Empower survey found that half of Americans have experienced what it calls "financial FOMO".
By the time the internet is talking about how great an investment is, that investment has likely already been overbought and grown more expensive — and it could be about to be abandoned by earlier buyers who have decided to sell. The crowd arrives last and pays the highest price.
Why the brain falls for it
The bias has deep roots. In prospect theory, Daniel Kahneman and Amos Tversky showed that losses loom larger than equivalent gains: the pain of missing out registers in the brain much like a loss. Watching others profit can feel like losing, even when nothing in your own plan has changed.
Then comes social proof. The CFA Institute notes that investors tend to look to others for cues about how to behave, particularly in times of uncertainty or volatility. When everyone around you seems confident and successful, resisting the crowd feels wrong — even when the crowd has no better information than you do.
Economists call the mechanism an information cascade. In papers published in 1992, Bikhchandani, Hirshleifer and Welch — and separately, Banerjee — showed how rational people can form a herd by ignoring their own information, because the choices of others look more informed. The visible result is performance chasing: money pours into the funds and stocks with the best recent returns, exactly when they are most expensive. Morningstar's Mind the Gap 2024 study found the same pattern at scale: over the ten years to December 2023, the average fund investor earned 6.3% a year while the funds themselves returned 7.3% — a gap of 1.1 percentage points, or about 15% of the total return, lost mostly to timing.
What it costs: the GameStop lesson
The most famous example is GameStop. Thanks to social media hype, in January 2021 its share price rose from around $5 to about $120 in under three weeks — a gain of 2,300%. Many of those who arrived late to the party endured significant pain: after topping out at $120.75, it was trading for just $10.97 a few weeks later — a loss of 91%.
The pattern is older than social media. In the late 1990s, investors bought shares of unprofitable dot-com companies simply because they were popular. When the bubble burst, the Nasdaq fell nearly 80%, and countless portfolios suffered. The technology was real. The prices were not.
The cycle repeats because it follows the same steps: prices rise, excitement builds, the late buyer enters near the top, prices fall, and the same investor sells near the bottom — then watches the recovery from the sidelines. Buying at the top and selling at the bottom is rarely a knowledge problem. It is a psychological problem.
- GameStop, January 2021$5 → $120 in under three weeks (+2300%), then $10.97 (−91% from $120.75)
- The behaviour gapInvestors earned 6.3% a year vs 7.3% for the funds — a 1.1 point gap
- Dot-com bustNasdaq fell nearly 80% after the bubble burst
- Cooling-off ruleWait at least a month before acting on a hot idea
- Loss aversionLosses loom larger than equivalent gains
The boring habits that counter it
The defences are deliberately boring. Start with a written plan made before any money moves: what you will buy, why, how much of the portfolio it can take, and what would make you sell. A decision made in advance is much harder for a crowd to overturn in the moment.
Then add a cooling-off period. Peter Lazaroff, chief investment officer at Plancorp Wealth Management, suggests waiting at least a month before acting on an investment idea: investing is a long-term endeavour, so something that is a good idea today should still be a good idea in a month. If it does not feel that way after a month, you were probably speculating on price rather than investing in a business.
Finally, do the research — at least as much time as you would spend researching a holiday, a restaurant or a major appliance, using several sources rather than a single feed — and shrink the crowd's voice: less time watching tickers and account screenshots, more time on your own numbers. Discipline is boring by design. That is the point. Educational content, not investment advice.
