How FOMO Explans Meme Stock Manias

Fear is a human response with the power to motivate and guide human action—in this case the choice of what asset(s) to buy and sell. Investors shun that which they fear.
— Arnott and McQuarrie

Rob Arnott and Edward McQuarrie propose an economics of fear to replace the old-fashioned and unreliable academic models that attempt to predict investor behaviour via calculations of risk. 

And what exactly do Arnott and McQuarrie think investors are afraid of? Losing money (fear of loss or “FOL”), of course. But also of missing out on a big gain (“FOMO”). Not only does fear of missing out motivate investors, but it as powerful a motivation as FOL, say the two authors.

FOMO is as real and potent as FOL in guiding investor action. Stocks that are overpriced may nonetheless be regarded as attractive purchases if the investor fears missing out on still further price gains. This fear becomes palpable when a narrative of revolutionary change takes hold (e.g., dot-coms, EVs, AI, and countless previous examples). 
— Arnott and McQuarrie

FOMO helps explain Meme Stocks, companies whose shares rise in price mainly because of social media hype rather than fundamentals. That’s because fear of doing worse than one’s social group can be more potent than fear of falling short of some wealth target. A meme price boom acquires a momentum of its own as more and more members of one’s social group excitedly report their big gains.

Or, as a recently deceased Oracle of Finance, said:

The world is not driven by greed. It’s driven by envy.”
— Charlie Munger

You can read Rob Arnott and Edward McQuarrie's paper, Fear, Not Risk, Explains Asset Pricing, online for free.

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