From FOMO to oh no: Navigating the psychological pitfalls of investing
In the not-so-distant past, investing was a relatively slow-paced affair. You'd check stock prices in the morning paper, place trades by calling your broker, and receive quarterly updates on your portfolio by mail. Information moved at a leisurely pace, and so did most people's investment decisions.
Fast forward to today, and the investing landscape has transformed dramatically. With the rise of online brokerages, 24/7 financial news, and social media, the modern investor is bombarded with a non-stop barrage of market data, opinions, and hype.
In this hyperconnected environment, it's all too easy for our emotions to take the driver's seat and steer our financial choices into hazardous territory.
As a certified financial planner, I've examined how self-awareness and strategic mental framing can help us navigate even the choppiest financial waters. Let's look at some of the key psychological pitfalls of modern investing and explore strategies for staying rationally anchored amidst the noise.
The double-edged sword of real-time information
One of the biggest game-changers in modern investing is the sheer speed and accessibility of financial information. Gone are the days of waiting for the evening news or the next day's paper to find out how the markets performed.
Now, real-time stock tickers and breaking news alerts follow us from our computer screens to our pockets, enabling us to track every micro-movement in the markets.
On one hand, this democratization of financial data is incredibly empowering. Investors have never had easier access to the information and tools needed to make informed decisions. However, the flip side is that this constant stream of stimuli can also breed anxiety, impulsivity, and short-term thinking.
With so much information and so many tools at our fingertips, it's also easy to fall into the trap of thinking we know more than we actually do. This cognitive bias is known as the Dunning-Kruger effect — the tendency for people with limited knowledge to overestimate their competence.
Watching the market's daily (or even hourly) fluctuations can trick our brains into overestimating the significance of these small blips. A 2% dip can feel catastrophic when you're glued to the minute chart, even though rationally we know such volatility is par for the course.
This myopic focus can lead investors to make fear-based, knee-jerk reactions instead of staying aligned with their long-term strategy.
Additionally, the sheer volume of financial content available today can be overwhelming. With countless pundits and opinions just a click away, it's tempting to give in to decision fatigue and analysis paralysis.
Decision fatigue refers to the deterioration of our decision-making quality as we make more and more choices. Each decision we make depletes our mental resources a little bit, until we eventually start making increasingly impulsive or irrational choices.
Analysis paralysis, on the other hand, is when we become so overwhelmed by the complexity of a decision that we fail to take any action at all. We get caught in an endless loop of researching and weighing options, never feeling quite confident enough to pull the trigger on a trade or investment.
The dopamine rush of day trading
For the vast, vast majority of people, day trading isn’t a good idea. Why? The constant stream of market data doesn't just affect our emotional states — it can also alter our brain chemistry. Studies have shown that frequent trading can trigger the release of dopamine, the neurotransmitter associated with pleasure and reward. This is the same chemical reaction that underlies addictive behaviors like gambling and substance abuse.
In one experiment, researchers at the University of California, Berkeley, had participants play an investing game while scanning their brains. They found that when subjects made profitable trades, their nucleus accumbens — a region associated with reward processing — lit up with activity. The more frequently they traded, the more intense this response became.
This suggests that for some people, the thrill of the trade itself can become more compelling than the objective of building long-term wealth. App developers have become adept at tapping into this vulnerability, using gamification tactics like points, streaks, and leaderboards to keep users engaged.
Social media and the herd mentality
Another defining feature of modern investing is the rise of social media as a major platform for financial discourse. From Twitter and TikTok to YouTube and Reddit, investors of all stripes can now connect and swap strategies in real-time. In many ways, this collective knowledge-sharing has helped level the playing field between Wall Street and Main Street.
However, the social nature of these platforms can also exacerbate some common investing biases, particularly herd mentality. Humans are hardwired to follow the crowd — it's an evolutionary instinct that kept our ancestors safe from predators. In an investing context, this translates to a tendency to pile into the latest hot stock or sector, simply because it seems like everyone else is doing it.
Social media can intensify this "fear of missing out" (FOMO) effect by making it feel like the whole world is getting rich off some trend you're not in on. It's hard to scroll past post after post about the next big thing without feeling the urge to jump on the bandwagon — fundamentals be damned.
Of course, just because something is popular doesn't necessarily make it a sound investment. Often, by the time a stock or strategy hits the mainstream, the easy money has already been made. Trying to chase those returns can lead to buying high and selling low — the opposite of common investing wisdom.
Confirmation bias in the echo chamber
Social media doesn't just amplify our fear of missing out — it can also reinforce our preexisting beliefs and blind spots. Thanks to those same algorithms, platforms tend to show us more of what we already like and agree with. Over time, this can create an echo chamber, where we're primarily exposed to information that confirms our existing views.
In the investing world, this confirmation bias can be dangerous. If you're convinced that a particular stock or sector is destined for greatness, it's all too easy to find yourself in online communities that share and validate that belief. Soon, you may find yourself dismissing or avoiding any information that contradicts your thesis, a behavior known as motivated reasoning.
Avoiding the online trap
The antidote to this social proof trap is to stay focused on your own financial goals and risk tolerance. Just because your college roommate made a killing on cryptocurrency doesn't mean you need to bet everything on Bitcoin. Develop a well-diversified portfolio aligned with your long-term objectives and stick to it.
It's also important to remember that for every overnight success story on social media, there are countless tales of quiet losses that don't make the highlight reel. Take everything you see online with a grain of salt and always do your own due diligence before making any moves.
The psychology of meme stocks — and the speculative bubble
Perhaps no phenomenon encapsulates the psychological perils of modern investing quite like the rise of so-called "meme stocks." These are companies that have seen their share prices skyrocket due to a perfect storm of social media hype, speculative frenzy, and FOMO.
The poster child for this trend is GameStop, the struggling video game retailer whose stock soared from around $17 to over $480 in a matter of days in early 2021, driven by a Reddit-fueled short squeeze. Similar stories played out with AMC, Blackberry, and other left-for-dead companies that suddenly became the darlings of online trading communities.
While some lucky investors made life-changing sums riding these waves, many more were left holding the bag when the music inevitably stopped. The problem with meme stocks (and speculative bubbles in general) is that they're driven more by collective emotion than by rational analysis.
When a stock's price becomes untethered from its underlying business realities, it's a recipe for volatility and, eventually, disappointment. As the saying goes, the market can remain irrational longer than you can remain solvent.
Narratives vs. numbers: The power of storytelling in investing
One of the key psychological drivers behind meme stock mania is the power of storytelling. Humans are wired to respond to narratives — it's how we make sense of the world and our place in it. A compelling story can evoke strong emotions and motivate us to take action in ways that raw data and analysis alone often can't.
In the case of GameStop, the narrative was one of scrappy retail investors banding together to take on greedy Wall Street hedge funds. It was a classic David vs. Goliath tale, easy to understand and emotionally stirring. Never mind that the reality was far more complex — the story took on a life of its own, propelling the stock to dizzying heights.
Navigating the hype
This isn't to say that all popular stocks are inherently bad investments. But it's important to distinguish between companies with genuine growth potential and those coasting on hype alone. Take a hard look at the fundamentals. Does the company have a viable business model? Are its financials sound? Is its valuation justified based on realistic growth prospects?
It’s generally wise to be wary of any investment pitched as a sure thing or a ticket to overnight riches. Getting rich isn’t typically very sexy — it’s made up of slow, deliberate decisions over time — and mixture of diversification, patience, and discipline.
How to invest emotionlessly (or to try to, anyways)
Here are a few tips from me:
1. Create a written investing plan. Yes, in writing. Having a clear, documented strategy can be an anchor when the markets go up and down. Your plan should outline your goals, time horizon, risk tolerance, and target asset allocation.
2. Embrace automaticity. Set up automatic contributions to your investment accounts and consider using tools like target-date funds or robo-advisors to help maintain your desired allocation. The less you have to manually intervene, the less likely you are to make impulsive moves.
3. Be mindful. When you feel the urge to make a reactive trade, take a breath and get curious about what's driving that impulse. Is it fear, greed, or some other emotion? Acknowledge the feeling without judgment, then ask yourself if acting on it aligns with your long-term plan.
4. Be intentional about where you’re getting your information from. Curate a select group of reputable, long-term-oriented resources and tune out the rest. Follow investors with different strategies and time horizons to challenge your assumptions and blind spots.
5. Focus on what you can control. You have no say over what the market does on any given day, but you can control your own behaviors and mindset. Instead of obsessing over short-term returns, focus on optimizing your savings rate, minimizing fees, and maintaining a well-diversified portfolio. These may not be the sexiest strategies, but they're the ones most likely to pay off in the long run.
How financial education can help
Perhaps the most powerful tool for navigating the psychological pitfalls of modern investing is simply increasing our financial literacy. The more we understand about how markets work, the less vulnerable we are to being swayed by hype, emotion, or misinformation.
This education can take many forms — reading investing books, taking courses, listening to a podcast, or talking with an advisor. Here are some of my favorites:
“The Little Book of Common Sense Investing” by John Bogle
"The Psychology of Money" by Morgan Housel
Of Dollars and Data blog
It's also important to remember that financial literacy isn't just about memorizing formulas or picking hot stocks. It's about developing a healthy, resilient mindset around money and investing. This means learning to manage our own emotions, think probabilistically, and maintain a long-term perspective in the face of short-term noise.
Ultimately, the most successful investors are often the ones who stay the most rational. By cultivating self-awareness, sticking to a well-defined strategy, and continuously learning, we can chart a steady course through the choppiest of market waters.
