What is The Impact of FOMO on Financial Decisions?

From the GameStop short squeeze to the 2008 Housing Crisis, learn how FOMO influences financial choices and how to manage it for better investment decisions.

When reading articles on managing the fear of missing out (FOMO), one commonly shared good piece of advice is to limit social media usage. Are you allowing social media to influence your financial decisions? Social media has both positive and negative impacts on the market. To explore this further, check out this study on how social media influences financial decisions. Sometimes online hype causes stock prices jump and misinformation leads to poor investment decisions.Last month, a financial regulatory body in the United Kingdom, The Financial Conduct Authority, cracked down on illegal finfluencers. Investment decisions are a crucial aspect of financial planning. A key financial planning benefit is that it provides a structured approach to every aspect of financial management. However, you must not let FOMO cloud your judgment.

The Psychology Behind FOMO

What is FOMO?

Abbreviated as FOMO, fear of missing out is a perception that you are missing out on rewarding experiences that others are having. You feel that they are living better lives or having more fun. This sense of inadequacy, dissatisfaction, or exclusion can undermine your self-esteem, ultimately affecting your ability to make well-planned and informed financial decisions.

FOMO is an old phenomenon, but its study began with a 1996 research paper by a marketing strategist, Dr. Dan Herman. He was the one who coined the term.

What Triggers FOMO?

The following factors drive this psychological phenomenon:

1) Social media influence
2) Constant comparison to peers
3) Abundance of choices (the fear of missing better opportunities or making wrong choices)
4) Desire of belonging
5) Limited opportunities or resources (like a “limited-time offer”)
6) Unrealistic expectations (like “live your best life”)
7) Instant gratification culture

FOMO plays a role in:

1) Anxiety
2) Depression
3) Low self-esteem
4) Risky behavior

This is not a healthy state of mind for making any important decisions. When social media and other digital platforms constantly curate success stories and investment gains, FOMO-driven anxiety, depression, or low self-esteem ultimately triggers risky behavior.

Examples of FOMO in Financial Decisions

Investment Hype: GameStop, a doomed company with an outdated business model, became a case study on short trading. This US-based chain of video game retail stores valued at $3.25 per stock gained momentum. Believing that hedge funds like Melvin Capital were over-shorting GameStop, retail investors on Reddit’s WallStreetBets forum initiated a short squeeze. As retail investors began buying up GameStop stocks, a time came when the price reached as high as $400 per share. Here, rapid price increases became hyped by the media. Driven by fear of missing out on potential profits, many new retail investors also joined in. Short-selling hedge funds were forced to cover their positions by buying back shares at such high prices. This artificial bubble driven by investment hype was eventually destined to burst. It crashed and those who had invested at the peak (due to fear of missing out) suffered significant losses.

Lifestyle Inflation: Lifestyle inflation or lifestyle creep refers to the tendency to increase spending when you start making more money. Many people use this extra income to upgrade their lifestyle instead of leveraging it to enhance their financial management planning and long-term security. They fail to see this additional income as an opportunity to boost the wealth-building potential of their financial strategy. You notice others upgrading their homes and cars, going on expensive vacations, or indulging in luxury items. This may develop a desire to keep up. Don’t lose sight of your long-term financial goals. You have nothing to prove – no need to spend your money just to flaunt your new status. Lifestyle inflation is a silent killer of wealth.

The Lost Opportunities Perception: A clear example of the ‘buy now or regret it later’ mentality is the Subprime Mortgage Crisis of 2008. In the late 1990s and early 2000s, the availability of easier credit and low interest rates fueled a greater appetite for risk. Then subprime mortgages and adjustable-rate loans made homeownership more accessible. As home prices began to rise, there was a widespread perception that not investing in real estate meant missing out on an opportunity that guaranteed wealth building. Many first-time investors and even seasoned ones took high-risk loans and overlooked potential risks. With relaxed lending standards, many individuals with poor credit took high-risk loans. Many people made emotionally driven decisions to secure, what they believed was, a “once-in-a-lifetime” opportunity. The bubble began to burst in 2007, revealing a clear mismatch between home values and the mortgages people had taken. As home prices took a nosedive, foreclosures and defaults surged.

Negative Consequences of FOMO-Driven Financial Choices

Financial Instability: The choices you make with effective financial planning benefit both short-term needs and long-term security. However, FOMO-driven financial decisions often divert you. You may underprioritize paying off debt, maintaining emergency funds, or saving for retirement when you aim to gain from the next hot opportunity. Investing money into cryptocurrencies or high-volatility stocks just because you don’t want to miss out can drain your savings and even accumulate debt.

Emotional Toll: The anxiety over missed opportunities can create significant emotional stress. Consumed by the desire to keep up with trends, many individuals make investments without fully understanding the risks involved. This is poor decision-making. Regretting over past choices and worrying about financial security cause a feeling of dissatisfaction and hurt your mental well-being.

Missed Long-Term Goals: FOMO-driven financial decisions are often made without a solid financial plan. This happens at the expense of long-term financial stability.

How to Recognize and Manage FOMO in Financial Decisions

Self-Reflection: Take a pause and evaluate your financial planning and goals. The financial decision you are about to make, is it aligned with your overall financial planning? Are you being influenced by fleeting trends? Gain clarity before making any decision.

Conduct Research: Thorough research uncovers the potential risks and rewards of an investment opportunity. It makes you an informed person who does not react to hype. You make smart, calculated decisions offering you true advantages of financial planning.

Avoid Herd Mentality: Ignore external pressure and focus on your individual financial management strategy while making decisions. Control your urge to rush into high-trends. Focus on sustainable growth. There is money to be made in popular investment trends, but ensure your decisions are specifically aligned with your goals and risk tolerance. Trust Diversified Consumer Planning LLC as your investment partner to make investments.

Set Boundaries: Assess your financial situation and establish clear boundaries.Determine your risk tolerance. Setting clear boundaries helps you avoid impulsive decisions and minimizes risks to an absolute minimum.

Focus on Long-Term Goals: When considering an investment in a short-term opportunity, ask yourself this key question: Will it bring me closer to achieving my long-term goals?

Books Recommendation

1) Fear of Missing Out: Practical Decision-Making in a World of Overwhelming Choice

2) Navigate the Noise: Investing in the New Age of Media and Hype

3) House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again