Fear, not “fear and greed”: what FOMO and FOL mean for advisers
The phrase “markets are driven by fear and greed” is tossed around as if it’s timeless wisdom. It isn’t. Fear is an emotion; greed is a character judgement. We all experience fear – but we’re not all “greedy”. That distinction matters because it points to a more accurate and useful lens for client conversations: fear shows up in two context-dependent ways that can explain both booms and busts.
A recent working paper by Rob Arnott and Edward McQuarrie argues that asset prices are better understood through two fears: fear of missing out (FOMO) and fear of loss (FOL). In their “fear theory”, investors actively seek upside (skew) when FOMO dominates and actively avoid downside (semivariance) when FOL dominates, challenging the idea that people dislike variance symmetrically. (For the technically minded: the paper maps these to a preference for big-outlier gains and an aversion to downside-only volatility – i.e., a preference for “skew” and an aversion to “semivariance”.)
Put simply: investors love good surprises and hate bad ones – and which fear is louder changes over time.
Why replace “risk” with “fear”?
Traditional risk models assume that higher variance should be rewarded with higher expected return. The paper chronicles how often this breaks down in the historical record, with decades in which equities underperform government bonds and other decades of outsized equity gains – too volatile to look like a stable “risk premium”. The chart on page 15 shows rolling 10-year equity premia repeatedly flipping sign; the chart on page 17 shows investors in some eras waiting decades for stocks to beat long bonds. That pattern is hard to square with a stationary, variance-based risk-return trade-off, but it makes sense if we acknowledge that the nature of investor fear changes over time. Sometimes people fear falling behind friends and headlines (FOMO); other times, they fear seeing their balance fall (FOL).
Crucially, the authors argue that there is no “fear-free” asset. Cash can feel unsafe when real yields are negative; even inflation-linked bonds can lock in a real loss at specific starting yields. What people fear – and therefore demand – moves around, and so do prices. This is a better description of lived investor behaviour than the tidy but fragile assumption that variance alone drives returns.
One emotion, two contexts
“Fear and greed” lump together unlike things. FOMO and FOL are both fears, but their behavioural implications differ:
- When FOMO dominates, investors chase positively skewed pay offs (the possibility of big winners), narratives spread socially, and prices can detach to the upside.
- When FOL dominates, investors overweight the pain of drawdowns, shun volatile assets, and crowd into “safe” havens – even at poor long-run value.
That single-emotion, two-context view aligns with decades of behavioural evidence. “Prospect Theory” shows losses loom larger than equivalent gains, so downside and upside are not processed on a single, symmetric utility curve (Kahneman & Tversky, 1979). Narrative contagion helps explain how FOMO spreads and self-reinforces (Shiller, 2017). Investor sentiment cycles are observable in cross-sectional returns (Baker & Wurgler, 2006). Arnott and McQuarrie integrate those insights into a practical frame for markets: FOL tilts pricing toward semivariance; FOMO tilts it toward skew.
Bringing EI to the investment conversation
If emotions drive behaviour more than logic, then emotional intelligence (EI) is required to communicate effectively with clients. Here are three ways to apply it:
1) Reframe “risk” in the client’s language.
Volatility is not the villain; regret is. Try questions that surface which fear is louder now:
- “What would feel worse over the next three years: being 15% down on paper, or watching peers make gains while you sit out?”
- “When markets move, do you worry more about falling behind – or about falling in value?”
As Arnott and McQuarrie note, trying to capture a client’s attitude with a single “risk tolerance” score is crude because most people crave upside and hate downside at the same time. Separating those feelings gives you a cleaner read.
2) Build two clear portfolio jobs.
Design around both fears, explicitly:
- A safety bucket that aims to minimise the chance of nasty surprises in bad markets.
- An opportunity bucket that gives a fair shot at the big winners that drive long-term growth.
The paper suggests moving away from “blend and hope volatility cancels” toward this two-part approach: protect what mustn’t fall, and own enough of the market to capture the handful of outsized gains that create most of the wealth.
3) Coach the social side of FOMO.
FOMO is social – clients compare themselves to friends, feeds, and colleagues. Make those triggers discussable: “What headlines or WhatsApp chats tempt you to jump?” Agree in advance on cool-off rules (e.g., sleep-on-it periods, scheduled rebalances) so the plan survives the next Twitter (X) storm. The authors explicitly connect recurring booms to social contagion, so it’s worth discussing how stories that ‘everyone is winning’ nudge clients toward action.
Communicating with clarity (and empathy)
Language matters, and small changes in how you phrase things can help clients understand. For example, swap “fear and greed” for “two kinds of fear – falling behind and falling in value”. Here are a few other client-friendly statements:
- “We’re planning two things for you: protection from loss you can’t afford and participation in gains you don’t want to miss.”
- “Volatility isn’t the enemy; permanent loss and permanent regret”
- Replace “risk” with “what you fear most right now”.
That framing legitimises emotion without letting it drive the bus. It also raises your value: without EI, advisers misread the fear in the room, miscommunicate, and recommend products that fit a model but not a person. With EI, you can diagnose which fear dominates, design accordingly, and coach clients through the cycle.
Bottom line
Markets don’t swing between an emotion and a moral failing. They swing between two forms of fear. Accept that, and many anomalies in history look less puzzling. More importantly for practice, your advice becomes more human and more effective.
References:
Arnott, R. D., & McQuarrie, E. F. (2025). Fear, Not Risk, Explains Asset Pricing (SSRN working paper). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5127501
Baker, M., & Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. Journal of Finance, 61(4), 1645–1680. https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2006.00885.x
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291. https://www.jstor.org/stable/1914185?origin=crossref
Shiller, R. J. (2017). Narrative Economics. American Economic Review, 107(4), 967–1004. https://www.aeaweb.org/articles?id=10.1257/aer.107.4.967Fear, not “fear and greed”: what FOMO and FOL mean for advisers