Home › Academy › Investor psychology
Beginner · Lesson 2 of 4Overconfidence, herding and FOMO
Studies by Brad Barber and Terrance Odean found that the individual investors who traded most earned the lowest returns, largely because of costs and poor timing. Overconfidence makes us trade too often and hold too few positions.
Herding means following the crowd. It fuels bubbles (dot-com 1999-2000, meme stocks 2021, many crypto manias) and panics. Fear of missing out (FOMO) pushes people to buy after big rises, exactly when expected returns are lower.
Antidotes: a written plan, a cooling-off rule (wait 48 hours before acting on a hot tip), and checking what the base rates say rather than the story.
Key takeaways
- Trading more has been linked to earning less.
- Herding drives bubbles and crashes.
- Use cooling-off rules and base rates.
Check your understanding
1. Barber and Odean found the most active traders...
- Earned the highest returns
- Earned the lowest returns
- Matched the market
- Paid no costs
Show the answer
Earned the lowest returns. Costs and timing errors hurt frequent traders.
2. A good defence against FOMO is...
- Buying immediately
- A written plan and a cooling-off period
- Using more leverage
- Following social media
Show the answer
A written plan and a cooling-off period. Delay gives your rational mind a chance.
Go deeper
- Wikipedia: Overconfidence effect
- YouTube videos: investor psychology overconfidence herding FOMO
- Investopedia: herd mentality
- Wikipedia: Herd behavior
Practise this in Vestora
Look up real shares, test ideas with paper trading, and track your progress through the course.
Open the app freeGeneral education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.