Korea's FOMO power and stock investing

Korean Confucianism’s philosophical foundation places moral responsibility, diligence and work ethic at the center of social cohesion. Within this context, gambling represents unearned wealth, which runs against the collective framework on which Korean society is based and calls for shame for the individual. By contrast, in the West, gambling is viewed as a matter of personal freedom and leisure.

As a result, the Korean government maintains a general ban on legal gambling, with only limited avenues available to Korean nationals. Public stigma is the reason for the surprisingly limited growth of legal betting, which is suppressed by systematic scrutiny of gambling and speculation.

Whether social stigma disciplines the already speculative culture or simply fuels it is up for debate, but the result is a culture with pent-up demand for an outlet. It is similar to the situation the U.S. faced in the 1930s during the Prohibition era, when the U.S. government banned alcohol outright. In the end, the government decided that Prohibition encouraged illegal drinking and funded organized crime to the point that it may have led to a higher crime rate.

The lack of legal gambling alternatives is considered one of the reasons for the Korean stock market’s historically high volatility, as Korean investors seek unrealistic returns through speculative trading rather than a long-term investment culture. Korea's ban on gambling is pushing activity into the stock market as an outlet for gambling, which is tarnishing the market with participants seeking returns from speculation, insider trading and other forms of questionable trading. Allowing more legal options for Koreans with varying degrees of gambling intensity would bring more long-term investors to the stock market, as speculative participants move to other platforms.

A global trend is transforming stock markets into arenas of gambling and gaming, away from long-term investing. Over the year, the biggest attention has been on leveraged exchange-traded funds (ETFs), whose speculative, short-term trading culture drives high-risk, theme-focused ETFs packaged as “investments.”

Failed attempts to make steady, long-term ETFs mainstream products, such as dividend ETFs, high-yield ETFs, money market ETFs and “quality ETFs,” prove that retail investors want souped-up, supercharged, high-risk, high-reward ETFs they can monitor and trade all day long. Historically, Korea’s “hot money” has moved in search of unsustainable returns, even at the risk of significant downside. There are two reasons Koreans are leading the appetite for leveraged ETFs.

The lack of a long-term investment approach stems from Korea’s industries being built on an aggressive, cyclical business model. In the early years of Korea’s industrialization, this aggressive mindset served the nation well, helping it catch up to other manufacturing economies and expand its export footprint. The focus on sales growth, aggressive capex strategies, and balance sheet expansions over its overseas peers was considered the key factor behind the success of Korea’s industrial miracle.

But as the Korean economy matures, this approach is increasingly an impediment rather than a weapon. This deep-rooted, aggressive and sometimes reckless growth mentality shows up not just in businesses but also in investing, government policy and even tax laws. As a result, Korean retail investors are known for favoring momentum trading and chasing themes, which has been a major driver of cyclicality in the Korean stock market for decades.

Another social feature of Korea adding to the speculative momentum is the powerful FOMO (fear of missing out) culture. Social media triggers constant self-evaluation against materialistic benchmarks and lifestyles, based on a few seconds of “highlight reels.” FOMO is deeply embedded in the Korean social fabric; many attribute this to congested urban living, which fuels short-term competition and intense peer comparisons. The social anxiety stemming from FOMO is most evident in densely populated areas like Korea, where the Seoul metropolitan area accounts for more than 40 percent of the country’s total population.

With widespread access to and use of social media, the FOMO effect has morphed worldwide. Digital connectivity has charged people's desire to cross income levels, social standing and geographic boundaries. Fueled by blind envy, social media pushes people to chase fads, lifestyles and even financial status regardless of their ability to afford them. Similarly, online betting and trading capitalize on the desire for social belonging and envy, including the urge to join the herd on investment themes regardless of associated risks, as long as they align with their peers.

Since the COVID-19 pandemic, online trading has undergone a profound transformation, capitalizing on the FOMO phenomenon. The pandemic moved online trading from personal computers to mobile phones, quickly showing brokerage firms the opportunity to merge online trading platforms with gaming and gambling features.

A combination of technology and savvy marketing has taken stock trading to another form of investing, from baby boomers who benefited from buying and holding for the long term to Gen Z, who combine gaming (online video games) and gambling (online and sports betting) to day trading. Korean retail investors’ crowding into leveraged ETFs exemplifies this trend, with their penchant for momentum trading, FOMO and herd mentality on full display. The convergence of ETFs, prediction markets and online betting is a global trend, and Korean retail investors are at the forefront.

For Korea’s aging population, the shift from property speculation to wealth-building through steady income from the equity market is long overdue. However, it is ironic that Korea is finally seeking to establish a long-term investment culture through its market reforms, just as the rest of the world is moving toward a more speculative trading culture, a trend Koreans have traditionally been known for.

As the global phenomenon of the “gamification of the stock market” gains traction through the legalization of online gambling and platforms like Polymarket, it will be interesting to see how Korean investment culture evolves, with FOMO traders’ fund flows intertwined with the gradual inflow of long-term “sticky money.”

As local investors pile into the artificial intelligence-related supercycle, slow money riding on market reform efforts has been barely noticeable over this year. How policymakers and investors manage the complex interplay between the two pools of money will be critical in determining whether Korea will see structural re-rating and finally rid itself of the “Korea discount.”

Peter S. Kim is a managing director at KB Securities.