Investing with Eyes Wide Open—How FOMO, Herding and Flawed Incentives Distort Markets

Throughout business history, major investment bubbles—from tulip bulbs to internet stocks—have left behind puzzling lessons. Studies in behavioral economics reveal so much of this isn’t due to ignorance, but to deeply human instincts: fear of missing out (FOMO), overconfidence, and the herd effect. When others are rushing into a project, fund, or trend, there's a spike of social proof—evidence that seems to validate your emotional excitement, regardless of underlying value.

At the same time, incentives are often badly aligned. Professional investors, for example, may be rewarded for quick wins or relative returns compared to their peers—leading to risk-taking that feels safe, as 'everyone's doing it.' Social psychologist Solomon Asch famously showed that even in simple perception tasks, most people will pick the clearly wrong answer just to fit in with the group. Multiply this by millions and billions of dollars, and you have a recipe for bubbles in markets, careers, and culture.

The antidote comes from creating small pauses and external review loops—contrarian strategies proven to slow down collective irrationality. Asking for hard evidence, clarifying if excitement is crowd-driven or values-driven, and rewarding independent checks (not just quick wins) helps to balance boldness with wisdom.

Make a list of the popular choices or investments you see people around you making—whether in class, at work, or online. As you consider joining in, pause and honestly identify whether your drive is vision or just fear of being last. Approach someone outside your group, preferably without a dog in the fight, and share the opportunity for a fresh take—even if it feels awkward. At the end, jot down your own reasons for action: what real proof or outcome would justify the leap? If you do this before your next big commitment, you'll start training your FOMO shield.