FOMO, Overconfidence and Herd Behaviour
Buying because everyone else is making money, sizing up after a few wins, and mistaking a lucky streak for skill. The three crowd emotions that show up at exactly the wrong time.
- ·Fear of missing out
- ·Overconfidence after wins
- ·Herd behaviour and bubbles
- ·Luck vs skill
- ·Why tops feel safest
- ·Resisting the crowd
Arjun's office group chat would not stop buzzing. A small chemical stock had tripled in four months, and two colleagues kept posting screenshots of their profit. Every morning the stock was up again. By the time Arjun could not stand missing out any longer, he put in three months of savings near the top. The stock peaked the very next week. Within two months it had halved. The two colleagues had bought it a year earlier, almost by accident, and had quietly sold most of theirs into Arjun's buying. Arjun did not lose because he was stupid. He lost because three of the most natural human feelings in markets all pushed him in the same wrong direction at the same time.
This chapter is about those three feelings: FOMO, overconfidence, and the herd. They are not character flaws. They are normal, and they strike hardest at the exact moment they cost the most.
FOMO: the fear of being left behind
FOMO is the fear of missing out. In markets it shows up as a very specific pain: not the pain of losing money, but the pain of watching other people make it without you.
Notice how backwards that is. A stock that has already tripled is, by definition, more expensive and usually more crowded than it was. Yet that is exactly when it feels safest to buy, because the proof is everywhere. Your friend is rich on paper. The news is glowing. The chart only goes up. FOMO takes the riskiest moment and dresses it up as the most obvious one.
The trap is that the evidence FOMO feeds on is real. The gains other people made were real. The chart really did go up. FOMO does not lie to you about the past. It lies to you about what the past tells you about the future.
FOMO is buying because the price already went up, not because you have a reason to think it will go up from here. The fact that other people made money is a fact about their past, not your future.
Overconfidence: mistaking a bull market for skill
The second feeling shows up after you win a few times. Three or four trades go your way. The account is green. A quiet voice says: maybe I have a knack for this. So you put on a bigger position next time, skip the stop-loss "just this once," and trust your gut over your plan.
Here is the uncomfortable truth. In a rising market, almost everything goes up. A beginner who bought almost anything in 2020 and 2021, after the COVID crash recovered, looked like a genius. They were not geniuses. They were standing on an escalator that was going up and mistaking it for their own climbing. When the escalator stopped, so did the wins, and the bigger positions they had grown into turned small profits into real losses.
Overconfidence is dangerous because it changes your behaviour at the worst time. You size up after wins, which usually come in clusters during easy markets, so you are carrying your largest position right before conditions get harder.
After three or four winning trades you double your position size and stop using a stop-loss, because clearly you have figured it out. A winning streak in an easy market is the single most common reason beginners blow up. The better move is to keep your position size fixed by rule, not by mood, and treat a streak as luck until proven otherwise.
Luck versus skill: telling them apart honestly
The whole problem behind overconfidence is that luck and skill feel identical from the inside. Both produce a profit. Both feel earned. You cannot tell them apart by looking at a single result, the same way you cannot tell a fair coin from a lucky one after a single flip.
The only honest way to separate them is over many trades and with a process you can explain. Skill shows up as a result you can repeat and a reason you can describe before the trade, not after. Luck shows up as a result you cannot explain except by pointing at the outcome. Use this short, brutal checklist on your own wins:
Luck or skill? A self-honesty checklist
- Could I write down my reason for this trade before I entered, not after?
- Is this reason a rule I follow every time, or a one-off feeling?
- Did I make money because of my decision, or because the whole market went up?
- Would the same decision have worked on twenty other trades, or just this one?
- If a friend asked me to explain exactly why it worked, could I, without saying "it just went up"?
If most boxes are unticked, your profit was probably a gift from the market, not a skill you own. Gifts get taken back.
Herd behaviour: why agreement feels safe and is not
The third feeling is the herd. Humans are wired to copy each other, and for most of life that wiring keeps us safe. If everyone is running, you run first and ask why later. In markets this instinct quietly betrays you.
A bubble is what happens when the only reason left to buy is that everyone else is buying. Price stops being tied to the business and becomes tied to the crowd's mood. India has seen this again and again: small-cap and micro-cap frenzies where unknown companies double in weeks, IPO manias where people apply only because applications are oversubscribed, and "tips" that circulate on chat groups until the last buyer has bought.
The cruel part is the timing. The moment a stock feels safest, when every person you know agrees it can only go up, is often the moment of maximum danger. Why? Because if everyone has already bought, there is almost no one left to buy. Price needs new buyers to keep rising. When the crowd is unanimous, the fuel is gone.
"Everyone is buying it" is not a reason to buy. It is a warning that you may be one of the last buyers. When you cannot find a single person who disagrees, ask who is left to sell to.
How the three feelings hit each type of trader
The same crowd emotion shows up differently depending on what you trade. The danger scales up as leverage and speed go up.
| User type | How FOMO and the herd usually strike | Why it can hurt more |
|---|---|---|
| Long-term investor | Buying a "hot" small-cap or hyped IPO near the top because friends profited | Slowest to bite; a diversified SIP investor can ride out a bad entry over years |
| Stock trader | Chasing a stock that is already up sharply, skipping the stop after a winning streak | Faster damage; one chase against a fixed stop is survivable, repeated chasing is not |
| F&O trader | Piling into the trending index or option after a few leveraged wins, sizing up on confidence | Leverage magnifies both the gain that breeds overconfidence and the loss that follows |
| Option seller | Selling more and more options in a calm market because "it always expires worthless" | A long quiet streak feels like skill until one sharp move erases months of premium at once |
Notice the pattern. For the investor, crowd emotion is a slow leak. For the option seller, a long winning streak in a calm market is the most dangerous setup of all, because it manufactures the exact overconfidence that one violent expiry can punish.
When this fails
Avoiding the crowd is not the same as always doing the opposite of it. That is its own trap.
- Crowds are sometimes right. Strong stocks can stay strong, and a rising market can keep rising for years. Selling everything just because others are buying is also a crowd reaction, just the contrarian one. The goal is to have your own reason, not to flip the crowd's.
- "It is a bubble" is easy to say and hard to time. Markets can stay irrational far longer than you can stay solvent. Calling a top and shorting it has ruined as many people as buying the top did.
- Some FOMO is just a missed opportunity, and that is fine. You will miss winners. Missing a winner costs you nothing you ever had. Chasing one can cost you money you did own. They are not the same, even though they feel the same.
- A losing streak can fool you too. Just as a winning streak breeds overconfidence, a run of bad luck can make a sound process feel broken and tempt you to abandon it right before it would have worked.
This chapter is education, not advice. The aim is to recognise these feelings in yourself, not to give you a signal to act on.
Quick self-check
1. What is FOMO, in one sentence, and why is it dangerous?
FOMO is buying because the price already went up and others are profiting, not because you have a reason to expect it to rise further. It is dangerous because it pushes you to buy at the most crowded, most expensive moment.
2. You have won four trades in a row. What is the safest assumption to make?
Assume it was luck until proven otherwise, especially if the whole market was rising. Keep your position size fixed by rule rather than sizing up on confidence.
3. From a single profitable trade, can you tell whether you are skilled or lucky?
No. Both luck and skill produce a profit and both feel earned. Only many trades and a reason you can explain in advance separate them.
4. Why is "everyone is buying it" a warning rather than a reason?
Because rising prices need new buyers. If almost everyone has already bought, there is little fuel left, so unanimous agreement often marks a top rather than a safe entry.
5. Why does a long winning streak hit an option seller especially hard?
In a calm market, selling options that keep expiring worthless feels like pure skill and tempts you to size up. One sharp, sudden move can then wipe out months of collected premium at once.