Memo 05: Fear and FOMO - The Market’s Real Drivers
For decades, modern portfolio theory told us that higher risk meant higher returns. The trade-off was simple: if you wanted to earn more, you had to stomach more volatility (risk). But as the Economist [1] recently highlighted, that neat equation has frayed.
Despite growing macroeconomic hazards, from geopolitical tensions to unsustainable sovereign debt to slowing economic growth, many investors remain heavily exposed to risk assets. Equity indices in developed markets hover near record highs, reflecting the pull of fear of missing out (FOMO) on further gains.
Yet beneath this surface enthusiasm, the other great market force, fear of loss (FOL), has been quietly asserting itself. Over the past 12-18 months, global investors have been shifting substantial capital out of equities and into bonds, even at historically low yields. From pension funds and sovereign wealth managers to retail savers, this reallocation has pushed bond prices higher and yields lower, signalling a desire for safety and predictability over the possibility of higher but more volatile returns.
This tension, investors taking on more risk even when dangers are mounting or switching to bonds, sits at the heart of recent work by Rob Arnott and Edward McQuarrie [2], who argue that market behaviour is best explained by the push-and-pull of two distinct fears: the fear of loss (FOL) and the fear of missing out (FOMO).
Why “risk” isn’t what investors actually fear
For much of the 20th century, finance was built on a clean equation: investors are rational, markets are efficient, and risk is measured by variance (the up-and-down wiggles of returns). This was the era of Harry Markowitz’s portfolio theory, the Capital Asset Pricing Model [3], and the idea that volatility itself was the price you paid for higher returns.
Variance assumes investors dislike all volatility equally. But that’s not how human psychology works. In the late 1970s, two psychologists, Daniel Kahneman and Amos Tversky, upended this neat picture. In their groundbreaking Prospect Theory (1979) [4], they showed that people don’t treat all volatility equally. Losses hurt about twice as much as equivalent gains feel good. Investors rarely complain about volatility when it’s an upside surprise: a 40% unexpected gain is welcomed, not feared. What keeps people awake at night is the downside: permanent impairment of capital.
This “loss aversion” became the cornerstone of what is now called “behavioural finance”, with Richard Thaler, Robert Shiller and others showing that markets often behave less like clockwork and more like a mood ring, swayed by fear, euphoria, and herd instincts [5].
Loss aversion was a breakthrough because it replaced the abstract idea of risk with a more human one: fear of loss. It explained why investors cling to safe assets in a crisis, why they sell winners too early, and why they will often accept lower returns to avoid the pain of seeing capital evaporate.
The recent working paper by Rob Arnott (Research Affiliates) and Edward McQuarrie (Santa Clara University) [6]suggests a simlar lens. Rather than thinking in terms of “variance”, which is the traditional mathematical definition of risk, investors may actually make decisions based on two primal impulses: fear of loss (FOL) and fear of missing out (FOMO).
In Arnott and McQuarrie’s framing:
FOL = the dread of losing money, even on paper, especially if it might not come back.
FOMO = the anxiety that others are getting rich without you.
Traditional stock–bond return history shows the “equity risk premium”, stocks beating bonds over time, has not been as persistent or stable as textbooks suggest. In fact, over the last 230 years in the US, 70% of equities’ outperformance came from a single exceptional half-century (1950–1999). In other eras, bonds matched or beat stocks for decades at a stretch. For most of the world outside the US, long-run stock returns have been far less impressive.
Where alternative assets fit in
If investors are truly driven by FOL and FOMO, the case for alternative assets changes. Instead of simply asking, “Will this beat the market over 30 years?”, they ask:
“Will this protect my capital?” (FOL)
“Will I miss a rare opportunity?” (FOMO)
Alternative assets, particularly private credit, offer a unique balance here. In a world where listed assets are priced for perfection, private markets let you step away from the crowd and focus on idiosyncratic, collateral-backed opportunities with contractual cash flows.
The private credit advantage
Private credit provides:
Predictable income: Debt returns are set by contract, not market mood.
Collateral security: Loans are backed by tangible assets.
Structural protections: Covenants, personal guarantees, and conservative underwriting mitigate downside risk.
But not all private credit is created equal.
In the public high-yield bond market, spreads are razor thin, and investor protections are often weak. In direct lending, especially at low loan-to-value (LVR) ratios, the fear of permanent loss can be addressed in a way listed markets can’t match.
Why farmland matters
When the collateral is productive Australian farmland, several structural advantages emerge:
Intrinsic value: Farmland has historically shown low correlation with equities and resilience in downturns.
Essential use: Regardless of economic cycles, agricultural land continues to produce food and fibre.
Scarcity: Quality arable land in prime locations is finite.
Inflation linkage: Agricultural asset values often benefit from inflation in commodity prices.
A well-structured low-LVR farmland-backed loan (say, 40–50% of conservative valuation) can significantly reduce the probability of loss. Even in stressed scenarios, the underlying asset can be sold or re-leased to recover principal.
For the investor, this directly addresses FOL. The anxiety of permanent capital loss is mitigated by the tangible, essential, and historically stable nature of the collateral. At the same time, the yield, often in the high single digits or low double digits, is a compelling antidote to FOMO, particularly in an environment where cash and government bonds may deliver only modest returns.
The psychology of comfort in uncertain times
In a world where risk–return theory doesn’t always hold, the real edge may come from psychologically sustainable investing. If a portfolio allows you to sleep at night because your downside is genuinely limited, you’re more likely to hold through cycles and let compounding work.
Low-LVR private credit backed by farmland is not immune to risk, no investment is. It does, however, reframe the discussion. Instead of a binary choice between high-return/high-risk equities and low-return/low-risk government bonds, it offers a middle path: contractual returns backed by real assets with enduring value.
For investors navigating an age of market froth and geopolitical uncertainty, it may be the rare asset class that satisfies both primal fears: the fear of loss and the fear of missing out.
[1] https://www.economist.com/finance-and-economics/2025/08/06/want-better-returns-forget-risk-focus-on-fear
[2] Arnott, R., & McQuarrie, E. (2024). Fear and FOMO: Rethinking the Drivers of Asset Prices. Working Paper, Research Affiliates & Santa Clara University.
[3] Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91.
[4] Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291.
[5] Thaler, R. H. (1993). Advances in Behavioral Finance. Russell Sage Foundation. Shiller, R. J. (2000). Irrational Exuberance. Princeton University Press.
[6] Arnott, R., & McQuarrie, E. (2024). Fear and FOMO: Rethinking the Drivers of Asset Prices. Working Paper, Research Affiliates & Santa Clara University.