[14] FOMO, Bubbles and Missing the Boat
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Hope you had a great weekend! It’s already the last week of April. ⏰ 🕊
FOMO is all around us and it drives more of our behaviors than we’d like to admit. For our longer essay this month, we are going to explore FOMO and unpack it!
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Do You Even FOMO? 🛁 🫧 🥂
When I was in graduate school, one of the things that caught me by surprise was seeing so many smart, capable people succumb to “fear of missing out” or FOMO. This four letter acronym seemed to control and dictate behavior more than anything else. What ends up happening is that you feel some sort of obligation to attend an endless number of events even if you don’t want to.
The fear is rooted in the fact that something might happen at an event and you won’t be there to experience it.
But FOMO doesn’t drive the best experiences — if anything, it drives only the most number of experiences. It helps you optimize for the most events, but not necessarily the most high quality events. There also seems to be a badge of honor element to the people who exhibit FOMO, in the sense they can claim they’re able to attend all of these events.
“I ... was... there... for... all... of... it...”
FOMO though appears everywhere, and especially throughout history. Particularly financial history and during periods of speculative crazes. Without FOMO, the velocity of any bubble or the size of any bubble wouldn’t reach the peaks unless there was some element of FOMO.
The South Sea Company 🌊 ⛵️
For example, take the South Sea Company, a trading company that was set up to take over the debt of the British government in the 1700s. Debt Holders who held British government debt could trade in their debt for some number of shares in the South Sea Company. For assuming the government’s debt, the British government gave the South Sea Company exclusive monopoly rights in South America and would also pay the South Sea Company a recurring fixed payment, in the order of what the interest on the debt would have been.
So at a high level, the deal looks like this:
Debt holders can get shares in a new company backed by the government with some monopoly right granted to the company.
Holders are trading in their fixed cash flow backed by the faith of a big powerful government, for an asset with variable value in a newly created company.
The government offloads the debt to the South Sea Company (and the South Sea Company is now on the hook to pay back lenders... i.e. the people).
The South Sea Company gets to sell some number of fixed shares, first to the existing debt holders in an attempt for conversion and second any remaining in the open market.
This structure is accelerated by FOMO, as no fundamentals and/or history of the company exists at the time this deal was offered… so there is no track record on performance, metrics, business fundamentals, operations or anything that an established company with a trading and operating history would have.
However, the key here is that everyone wins if the share price of the South Sea Trading company goes up.
Debt Holders will now hold shares, so as long as the value is above or rises above the value at the time of conversion, they can then sell those shares and make money incremental to what they would have made by holding the debt (additional loan value plus expectations of interest).
The South Sea Company will also benefit because the higher the value, the less shares in the company they have to give away and the more they can keep as profit to go do other things with.
The government already won since it offloaded its debt to the South Sea Company, but just in case, the South Sea Company also offered employees of the government shares in the company.
So everyone has an incentive (desire) for the price to continue to rise.
Now if you are an outsider, and the stock is getting floated and you read some of the headlines highlighting how the South Sea Company had a high subscription rate from debt holders, people in the government are also “investors” in the company and it has a monopoly in some region of the world, you would think it’s worth a second look and maybe it’s time you also jumped in as well.
This of course drives up the price of the shares, which then further supports this entire structure.
Then the South Sea Company was also able to help you “mortgage” shares, where you pay a deposit, or the equity payment which is less than 100% of the cost to purchase the shares, and then you can pay down the rest over time while the shares remain with the South Sea Company, but is somewhat “under your ownership.”
This created even more demand for the shares, since the barriers of entry were lowered. This of course continues to drive up the stock price, making the original three parties very happy.
Now it’s important to realize that through each part of this transaction, there was an opportunity for FOMO to really kick in and drive people’s behaviors.
If we go a few layers deeper and try to imagine a person’s thought process, we can really begin to understand FOMO.
Why Fear OMO? 🌬 ⛵️
It’s insanely hard to be the one person who missed the boat, even if there is a chance that the boat may crash and burn.
If the boat doesn’t crash and burn, and you missed it, you have to live with the idea that all your neighbors and all these random people in your life just got rich or made some good money… and you didn’t!
That feeling of being left out is so bad that you would rather jump on a sinking ship altogether.
If being right meant that you are alone and being wrong meant that you are together with others, there is a fair amount of people who would prefer the latter.
The irony here is that being right usually means you have to be contrarian or think about things in a way that no one else is thinking about — so in that model, you have to choose the lonely road. But the opposite happens because people have some sort of innate need to be validated by the group. It seems like loneliness or being singled out is a terrible feeling that people would rather avoid, even if it meant they could be right.
So in terms of a hierarchy of needs, social acceptance seems to rank higher than the need to be right. What’s even more interesting is that once you give people the opportunity to connect with others in a global way (like the internet), people end up not seeking out different beliefs, but rather seeking out opinions that already confirm their existing beliefs (and by the way, this is then heavily reinforced by platforms).
They don’t assume they can be wrong, they assume they are right and therefore see the world in a way where they want to identify and group themselves with people who already agree with them.
So when FOMO happens, what is really happening is that people don’t want to miss out on being part of a group. Sometimes the group is functional, like making money from a deal … and you doesn’t want to miss out on that. Other times, and maybe more often than not, it’s just a simple need to belong. 🫂 🫂 🫂
This is why it’s so hard and challenging to be contrarian, and this is why at heart the issue is about being comfortable being alone or being happy missing out on something.
JOMO (Joy of missing out) 📈 🙌
So are we all screwed then and we’ll just jump into things because of FOMO? 😭😭😭
Enter JOMO or the joy of missing out.
If you don’t want to lead your life with FOMO and succumb to the social pressures to go do something even if you don’t want to, you have to be ruthlessly deliberate and intentional with your time and choices.
But by being deliberate and intentional, chances are you are going against conventional norms, especially if your framework goes against the decision of the masses.
All the people who already FOMO’d into something will call you crazy for not joining in. And it’s really tiring to listen a group of people constantly judging you because you didn’t want to FOMO in.
But if you are intentional and deliberate, you give yourself a framework for what you should participate in and what you should not participate in.
When you know what you want or don’t want out of an experience, there can be no “missing out.”
That is JOMO… the joy you get from missing out because you didn’t make a decision arbitrarily to jump into something you didn’t believe in.
Next time, when you are on an island and you think you missed the boat… consider that everyone on the boat may have missed the island.
JOMO.