We’re all vulnerable to it – that desire to ‘keep up with the Joneses’ that, from time to time, makes us feel inadequate and left behind. It’s a curious state of mind that results in “the fear of missing out” (FOMO).
To put it in more technical terms, according to the online platform Very Well Mind:
“The fear of missing out refers to the feeling or perception that others are having more fun, living better lives, or experiencing better things than you are.
…It involves a deep sense of envy and affects self-esteem. It is often exacerbated by social media sites like Instagram and Facebook. It can apply to anything from a party on a Friday night to a promotion at work, but it always involves a sense of helplessness that you are missing out on something big.”
What’s It Got to Do With Investing?
We’re raising the issue because, among the many examples of its – often unproductive – intrusions into our lives, ‘the fear of missing out’ has one especially toxic application that we should all be aware of.
Recently we came across a provocative paper published over a decade ago by the Graduate School of Stanford Business (GSB). Still relevant, it was called How the Fear of Missing Out Makes Investors Risk Blind.
Written by Marguerite Rigoglioso (October 1, 2007), the paper posed a penetrating question about a perennial vulnerability that many investors – from those just starting out to those who have been in the game for decades – are prone to. “People tend to cluster around risky categories,” the author observed, “out of a desire to avoid missing the next big thing.”
Herding Around Risky Investments
The insight might be somewhat dated but that doesn’t make it any the less true. People have an alarming tendency to herd around risky investments, precipitating bubbles that inevitably burst. We saw it in the dot.com bust. We saw it in the subprime mortgage market bust. Who knows what the future has in store for us.
The Role of Peer Pressure
According to Ms. Rigoglioso,
“Two Stanford researchers say that what investors fear the most is not the risk of a loss per se, but the risk that they may do poorly relative to their peers.”
The fear of missing out is part of what you might call the circuitry of temptation, one of whose mainsprings is the fear of missing out on the big score – that transformational investment that converts someone’s fortunes from solid to sensational.
Case in Point
The researchers behind the Graduate School of Stanford Business (GSB) research referenced earlier, found that investors tend to gravitate, in particular, towards high-tech investments that have the potential to revolutionize the entire market and promise a big upside: technologies like fibre optics, internet-related infrastructure, and electric vehicle innovation.
Consider the following extract from The Wall Street Journal: “Type the words ‘battery’ and ‘breakthrough’ into your search engine of choice, and you’ll encounter page after page of links. They include breathless news articles and lofty pronouncements from battery start-ups. And yet, according to scientists, engineers, start-up founders and analysts, the use of the word ‘breakthrough’ in the context of battery technology is misleading at best. Claims that the latest research finding or start-up launch will bear fruit in the near future are almost always nonsense, they say.”
Keeping up with the Joneses (missing out) isn’t always as profitable or desirable as it looks.