By David Koch, CFP®, AIF®, CFA, Senior Wealth Advisor
FOMO, the Fear of Missing Out, frequently drives investor behavior and can lead to bubble-like market environments. I talked about Veblen Goods in my last blog; now I’ll turn to Selection Bias and the Instagram Effect.
Only the good outcomes
“You wouldn’t believe it Jim, I’ve lost the kids’ college savings trading stocks this year.” “No way Bill! I did the same thing last year!” – said no one ever. This is why we have selection bias; we only hear about the good outcomes.
No one touts their mediocre round of golf, and no one ever talks about how much money they lost investing. This is partly because in our society we tend to conflate luck with skill – but we’ll save that misconception for another article.
Selection bias drives FOMO because when we only hear about others’ wins, we assume we’re missing out on our own: We may even assume that we’re the only bozo who ever lost money in the market.
Social media exacerbates the issue of selection bias. I call it the Instagram Effect. Does anyone ever post a crappy photo of themselves online? Nope, at least not on purpose.
Social media is filled with beautiful people doing amazing things in beautiful places. We all have those moments too sometimes, but the fact is, most of my day is spent hammering a keyboard in my home office in my sweatpants. No one wants to see that in their Instagram feed.
FOMO creates bubbles
When a friend or a salesperson tells you about a great investment – remember – they are most likely telling you what a great investment it WAS. Just because the price of an asset rose in the past, doesn’t mean that it will continue to rise in the future.
Think about it. Your friend tells you they doubled their money in the last three months. Do you want to buy in now? Do you think it’s going to double again? It’s highly plausible that everyone who doubled their money in the last three months is getting out.
FOMO creates and drives bubbles. Before Dogecoin and AMC this year, 15 years ago people were getting HELOCs and buying condos in Florida.
Other notorious bubbles include the dot-com craze, which included such notables as Pets.com, which went from IPO to liquidation in 268 days; and GeoCities, which Yahoo paid $3.6 billion for in 1999 (about $6 billion in today’s dollars). Have you even heard of GeoCities?
Before that, in the 1980s, there was the Japanese asset bubble, and the South Sea Bubble in the 1700s (in which Sir Isaac Newton allegedly lost his shirt), and the Dutch tulipomania bubble of the 1600s. This list goes on and on.
Thank you selection bias for causing FOMO, and thank you FOMO for causing asset bubbles.
Next up in the series: FOLÉ, an acronym that we coined here at HH that’s the flip side of FOMO. Stay tuned.
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