The Stock Market & FOMO
Contributions By Wendy Zhang & JW Rayhons
Experience as an Investor
Back in fall 2017, hypothetically there was a group of friends who can be thought of as aggressive investors and talked about buying Cryptocurrency. After days and days of listening to those conversations during lunch periods, one could be considering to open an investment account on Coinbase solely based on another promise - “trust me, it will go up”. Without any research, but with the fear of missing out, one may be moved to buy a fraction of Bitcoin.
That is an example of FOMO, fear of missing out, a common social anxiety in today’s social media generation, which can also be seen in the stock market on a day-to-day basis. It stemmed from the belief that others are having rewarding experiences without us. In the field of behavioral finance, this is also known as the Herd mentality.
What is Herd Mentality?
Herd mentality was first introduced by two French social psychologists, Gabriel Tarde and Gustave Le Bon, Finance. (2018). In A. Lewis (Ed.), The Cambridge Handbook of Psychology and Economic Behaviour (Cambridge Handbooks in Psychology, pp. 69-304). Cambridge: Cambridge University Press . This mentality describes how people can be influenced by their peers to adopt certain behaviors on an emotional, rather than rational basis. When people are affected by this mentality, investors will make their investment decision based almost solely on what they perceive others are buying or selling, rather than their own rational analysis.
In the above hypothectical example, instead of making a logical decision based on data and facts, the investor listened to a group of peers, who may or may not have also bought Bitcoin under the influence of herd mentality. It shows a lack of individual decision making. FOMO is the driving force behind this mentality.
How do we overcome Herd Mentality as individual investors?
In today’s world, people are always chasing for the next ‘Tesla’ stock while suffering large losses. Take the dotcom bubble as an example, many investors were eager to invest in any internet-related stocks, and despite the fact that many of those dotcoms were generating no revenue, much fewer profits. Investors are willing to overlook the traditional metrics and are anxious to chase the next IPO. At the time, the dotcoms were the bitcoin stocks at the dinner tables, many investment decisions were triggered by the FOMO.
However, the hard question is, how do we stay rational when the stock market goes up and down?
The answer is to be willing to stand out. Warren Buffett has once said, "Be fearful when others are greedy, and be greedy when others are fearful."
Be conscious of how your friends and families, are likely to influence your choices, take time to evaluate whether or not the choice you are making is your decision. You should always make an informed decision and invest in companies and industries that you understand.
Next time when the market crash, think logically and remember that the market will eventually recover from its losses, such as the most recent market recovery from the Covid-19 Pandemic. Most investors today do not have the time and energy to monitor their portfolio like a day trader, therefore, investors may want to consider to put their focus on the long-term gain instead of the short-term loss.Throughout history, we saw how these small market signals snowballed into behaviors like herding, and how herding causes the market to burst spectacularly, leading many investors with significant losses and companies going out of business
Next time when your portfolio takes your heart on a roller-coaster ride, just remember, sometimes in the market, it is better to be the lone wolf than a copycat.
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Wendy Zhang is a Non-Registered Associated Person with Voya Financial Advisors. Wendy cannot offer securities or advisory services.
The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.