Professor Alex Edmans on the Madness of Markets — Why Smart People Make Crazy Decisions

What can financial markets teach us about human behaviour? Why might the size of a CEO’s signature tell us something useful about the company they run? And why, even when smart investors know something is probably a bubble, might they keep investing anyway?

Episode Summary

My guest on this episode is Professor Alex Edmans, who returns to the show to discuss his new book, The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them. As the title suggests, this is a book about financial markets. But our conversation is really about something much broader: human behaviour.

Markets ought to be places where irrationality gets eliminated. They contain millions of participants, huge amounts of data and some of the smartest and best-paid people in the world. Yet people still overreact, follow the herd, become overconfident, refuse to admit mistakes and pay attention to things that shouldn't matter.

Alex explains why that happens and what it can teach us about decision-making beyond investing.We explore why seemingly trivial information can move markets, the fine line between conviction and delusion, and why information that's hiding in plain sight can sometimes tell us more than sophisticated financial analysis. Alex share why corporate jets, unusual locations for shareholder meetings and even the size of a CEO's signature can offer clues about how a company is run.

We also discuss information overload and our preference for things we can measure, why more disclosure isn't necessarily better disclosure, and how organisations can exploit the limits of human attention — including the strategic release of bad news on Friday afternoons.

He also considers the impact of AI; machines can process enormous quantities of quantitative information without some of our human biases, but qualitative judgements about character, culture and trustworthiness may still require people. The future, Alex argues, isn't necessarily human or machine, but human and machine. Along the way, we explore bubbles, loss aversion, sunk costs, incentives in investment banking, financial literacy and regulation.

And, ultimately, we return to a simple idea: markets behave irrationally because they're made up of human beings.

Guest Biography

Alex Edmans is Professor of Finance at London Business School, an author, speaker and expert on behavioural finance, responsible business and corporate governance. Before entering academia, Alex worked in investment banking at Mo