Written by Shruti Ramachandran

Summary:

Feeling left out due to social media’s constant stream of glamorous posts is a common experience, known as FOMO (Fear of Missing Out). This psychological condition drives people to seek social validation and make impulsive decisions, from buying the latest tech gadgets to jumping on stock market trends. The phenomenon is evident in events like the dot-com bubble and the GameStop frenzy, where herd mentality led to significant financial losses. To avoid falling into the FOMO trap, it’s crucial to educate oneself about investing, conduct thorough research, and focus on long-term financial goals, ensuring decisions are informed and rational rather than driven by hype.

Understanding FOMO

Have you ever felt left out or like you’re missing out on something because of social media? Scrolling through endless reels and posts from so-called influencers on Instagram, flaunting their adventures in exotic locations, can make anyone feel like a boring loser at least once. It’s not just influencers; even seeing friends and colleagues posting pictures from parties and events can trigger the desire to do the same, often just for the sake of it, regardless of genuine interest. 

This is, in its raw form, FOMO, a psychological condition where humans believe others are experiencing more valuable things than they are. At the core of FOMO, there is social validation and peer pressure so powerful that it results in making rash decisions to join the crowd, even if it is not in one’s best interest. This has been noted in examples where people will rush to buy the latest tech gadget or just join a new social media trend to belong. But what’s startling is that the same kind of herd mentality is rampant in the stock market, posing a threat to the very base of your financial future.

FOMO in the Stock Market

In stock markets, FOMO is when investors rush to buy stocks featured in the news with flashy headlines or suddenly rising prices. It can happen if a family member or friend has experienced significant returns after investing in the stock market, or if a stock goes viral on social media. Anything from the greed to earn quick returns to competitive pressure can cause FOMO; the reasons are countless and all around us.

This behaviour has been evident in a number of situations in the past. In the dot com bubble of the late 1990s, investors flocked to tech stocks without understanding the underlying businesses, leading to a market crash. The most recent one is the GameStop saga from early 2021. Driven by social media platform Reddit’s WallStreetBets, millions of investors joined a frenzy that saw prices go to never-before-witnessed levels. FOMO and herd mentality drove the rise; people wanted to be part of the potential profit-making journey at whatever cost, even if it meant flying in the face of reality. When the stock finally tanked; a large number were left holding significant losses.

Strategies to Avoid FOMO

So, to prevent falling into the trap of FOMO and herd mentality, it is essential to take a disciplined approach towards investment. Here are three key strategies:

1. Educate Yourself: Read about investing and behavioural finance; knowledge is your best tool against impulsive decisions.
2. Do Your Research: Go that extra mile, and read up on company research before you start investing. Check out the financial statements, market conditions, and the long-term prospects rather than the short-term hypes.
3. Set Long-Term Goals: Focus on your set long-term financial objectives. Investing with a long-term perspective helps prevent the short-term impacts of herd mentality from the short-term market fluctuations.

Conclusion

In conclusion, FOMO and the herd mentality are natural psychological behaviours. However, by making informed, rational choices, you can build a secure financial future, free from the whims of the crowd. Remember, in investing, it’s often the patient and informed who succeed, not those who simply follow the herd.