February Newsletter: ‘Fear culture’

15 February 2024

You may have heard of FOMO – the ‘Fear of Missing Out’ but what about FOMU – the ‘Fear of Messing Up’ now so widespread in a world where data is all pervasive. If data does anything it brings transparency. Every mistake we now make is witnessed, assessed and broadcast. Kids detentions are texted to parents. Excess behaviour on student nights out captured and posted. A single poor day in the office for a chef is online reviewed, influencing the perceptions of countless customers.  Our smallest mistakes are carrying over large consequences. Every little thing it seems matters.

As well as increasingly impacting our daily lives it is increasingly impacting our investment decision making. In finance, where arguably workers mental health has always been on a fine edge FOMU goes by a different name, ’Loss Aversion’. Loss Aversion is a human bias where individuals fear losses more than they value equivalent gains. The experience of negative outcomes tends to lead to overly cautious decision-making. ‘Once bitten twice shy’.

The discernible shift towards Index funds and away from smaller, riskier stocks finds its roots in ‘Loss Aversion’, so too does the ascent of private equity. The word private gives it away. Private equity invests in companies that are not required to disclose as much information as publicly traded companies. They don’t have stock market prices that rise and fall every day. In other words, they can mess up and just not tell anyone about it. That could give them an edge in our transparent FOMU world. More wiggle room to ride out the mistakes. But despite their large fees there is little evidence they produce better long-term returns. The increasing popularity of private equity investment has as much to do with being able to hide from the demands of daily data, thereby reducing investors FOMU, then by the returns they get.

It’s hard to see how we get FOMU back to manageable proportions where we take risk like we did in the past. Taking risk is essential for our society to progress, fostering a culture that acknowledges mistakes rather than heavily penalises them would help. But that goes against the grain of our now immutably measurable world. Here in the UK, recent headlines suggest that whether you’re a postmaster or a headteacher, the regulatory bodies are more focussed on blame and fear than understanding and encouragement. ‘Shoot first, ask questions later’ said the former head of the UK’s Financial Conduct Authority. What conduct is that encouraging? By acknowledging that perfection is an unrealistic standard, we can alleviate the burden of constant self-scrutiny and fear of mistakes. We are a long way from that point in UK society today so don’t expect Index funds or the strange desire by government to promote private equity investment to have run its course just yet. FOMU has joined ‘Risk’ as one of finance’s four-letter words!