Catching the FoMO Fever: A Look at Fear in Finance

Abstract

In this paper we investigate the phenomenon of “Fear of Missing Out” (FoMO) in financial markets, a concept that extends beyond social anxiety to significantly influence financial decision-making and investment behavior. FoMO has become particularly prominent with the rise of cryptocurrencies and social media's influence on investment decisions. We construct a comprehensive FoMO index, comprising elements such as market momentum, news sentiment, and margin account usage, to quantitatively measure FoMO levels in financial markets. Our analysis suggests that FoMO positively impacts equity and cryptocurrency prices. A surprising inverse relationship between FoMO and the CBOE Volatility Index (VIX) is observed, suggesting that increased FoMO leads to reduced market volatility due to decreased investor disagreement. A sectoral analysis using data from 48 different sectors indicates a varied influence of FoMO. At the household level, we investigate FoMO’s impact on investment behaviors, particularly in asset allocation to riskier investments. Our findings reveal that FoMO increases stock market participation and risk tolerance, particularly among minority and less-educated households. We also explore demographic susceptibilities to FoMO, finding that younger and minority households are more prone to its effects.

Keywords: fear of missing out; panic buying; minorities’ investment; fear of missing out; short squeeze; behavioral finance

JEL Classification: G10, G12