Passion Struck with John R. Miles - The Psychology Behind Why Smart People Make Terrible Decisions | Alex Edmans – EP 823

Episode Date: September 22, 2026

You're smart. You're informed. So why do you still make terrible decisions?We like to believe that intelligence and information protect us from bad decisions. They don't.Professor Alex Edmans, Professor of Finance at London Business School and Fellow of the British Academy, returns to Passion Struck to reveal the psychological forces that can distort our judgment—from confirmation bias and anchoring to herd behavior, emotional decision-making, and our tendency to follow whatever information is most visible.His new book, The Madness of Markets, uses financial markets to expose a much bigger truth about human behavior: the same biases that influence investors can shape the decisions we make in our careers, leadership, relationships, and everyday lives.Even Isaac Newton wasn't immune.In this conversation, Alex explains:Why being intelligent doesn't make you rationalWhy more information doesn't necessarily lead to better decisionsHow confirmation bias makes us see evidence that supports what we already believeWhy we tend to overreact to information that's flashy, visible, and impossible to ignoreHow anchoring causes the first information we encounter to influence our later judgmentWhy millions of people making the same mistake can create collective irrationality rather than canceling one another outHow compelling stories can overpower better evidenceWhy culture, human capital, reputation, and innovation can matter enormously even when they're difficult to measureWhy AI may change the decisions humans make without eliminating human biasAnd the one question Alex believes can make you wiser: “What is the other side?”Alex's advice extends far beyond investing. Before you change jobs, relocate, end a relationship, make a major purchase, or commit to an important belief, look for the strongest argument against your own position.If you can't see it yourself, find someone you trust who disagrees with you and ask them to make the case. Because becoming a better decision-maker isn't always about knowing more. Sometimes it's about learning to see what you're missing.Listen to the full shownotes Pre-Order The Mattering Effect: https://matteringeffect.com/. Take the 90-second diagnostic to see if you're disappearing.Explore the Show: https://passionstruck.com/starter-packs/. New to Passion Struck? Start with the best episodes curated for you.Connect with JohnWebsite: https://johnrmiles.comBook John to Speak: https://johnrmiles.com/speaking/Substack: https://www.theignitedlife.net/Children’s Book — You Matter, Luma: https://youmatterluma.com/Support the Movement: https://startmattering.com/. Every human deserves to feel seen, valued, and like they matter. Wear it. Live it. Show it.Passion Struck — #1 Alternative Health Podcast. 85M+ downloads.DisclaimerThe Passion Struck podcast is for educational and entertainment purposes only. The views and opinions expressed do not necessarily reflect those of Passion Struck or its affiliates. This podcast is not a substitute for professional medical or psychological advice. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

What if the information that matters most is the information nobody is paying attention to? We tend to react to what's visible, measurable, and impossible to miss. But what if that's exactly where everyone else is looking? My guest today Alex Edmund argues that flashy quantitative information can trigger overreaction, while quieter qualitative information can be overlooked by everyone at one. And that raises a much bigger question. What are we missing simply because we're not looking in the right place? Take a listen.

So something which is front page and flashy and more quantitative, it might get a stronger reaction. Something which might lead to underreaction is off the front page. So if something tends to be more qualitative, it might be more hidden. And it's not just hidden to me. It's hidden to you. it's hidden to other investors because naturally we like to plump for something which is flashy and visible. Hey, it's your friend John and welcome to Passionstruck. I'm so glad you're here. Whether you're a long-time listener or someone who just discovered the show, thank you for pressing play today.

Maybe you've built the life you were supposed to want, but you've quietly wondered why it still doesn't feel like enough. If that's you, you're in the right place. Every week, I sit down with the world's top scientists, researchers, and thinkers to uncover what it actually takes to build an intentional life that matters. Thanks for joining me. Let's get into it. Welcome back to Passionstruck Episode 823. In our current series, we've been exploring what it means to be an adaptive human, how we change, how we grow, and how we navigate a world that is constantly changing around us. Angela Duckworth started us off, and showed us how much our environments shape who we become.

Marty Seligman reminded us that we still have agency, the ability to believe our actions can make a difference. David Epstein explored how a broad range of experiences can help us adapt while also teaching us when constraints and focus matter. Cole Brower showed us what adaptations look like when there's nowhere to hide, alone at sea thousands of miles from home,

making decisions in real time, And Marissa Franco brought that journey inward, asking how we adapt without losing ourselves in the process. Today we turn our attention to something that shapes nearly every decision we make, the way we think. Because here's the uncomfortable truth. Being intelligent doesn't make us rational. And having more information doesn't necessarily make our decisions better.

In fact, when millions of people bring the same biases, emotions, stories and blind spots into the same system, those individual mistakes don't always cancel each other out. Sometimes they compound. That's where my conversation with Professor Alex Edmund takes us. Alex is a professor of finance at London Business School and a fellow of the British Academy. You may remember him from our previous discussion in episode 463. Today we're going to be talking about his new book, The Madness of Markets, Why Smart Investors Make Crazy Decisions and How to Exploit Them. This conversation picks up the thread of our last one where we talked about misinformation, bias, identity, and the stories we believe, and takes it

somewhere much bigger. What happens when millions of minds collide inside a system that we assume is rational? We talk about why investors overact information that's flashy and visible, while overlooking information that's quieter and harder to quantify. We explore herd behavior, confirmation bias, anchoring, the danger of following compelling stories, and why even extraordinarily intelligent people can fall victim to the same psychological traps. We also get into something I found particularly fascinating,

the things markets struggle to measure, culture, employee satisfaction, human capital, reputation, and innovation. These things can be enormously important to a company's long-term value, yet they're much harder to plug into a spreadsheet than an earnings number. And then we take the conversation into the future.

What happens to human judgment when AI becomes increasingly capable of making decisions for us? Alex argues that AI may make markets more efficient, but it won't make human beings immune to bias. Instead, some of these biologists, biases may simply migrate into the qualitative decisions that machine struggled to capture. And ultimately, Alex gives us a principle that extends far beyond investing.

To see the other side. Before you commit to a decision, look for the argument against your own position. Find the person who disagrees with you. Ask what you're missing. Because adaptation isn't just about changing what we do. it's changing what we're capable to see. Here's my conversation with Alex Edmonds. Thank you for choosing Passion Struck and choosing me to be your host and guide on your journey to creating an intentional life that matters. Now, let that journey begin. I am absolutely thrilled to welcome back

Alex Edmonds to Passion Struck. Welcome, Alex. So great to see you again. Thanks so much, John. It's really great to be back. Thanks for inviting me. Alex, the last time you were on passion struck, it's hard to believe. It was episode 463, and we explored your previous book, and we went into why people believe misinformation. We discussed things like confirmation bias, identity, the stories we tell ourselves, but reading your new book, which is about ready to come out, The Madness of Markets, which I loved, it almost felt like a sequel. It seemed like the first book explored how individuals become irrational. But this one, kind of explores what happens when millions of irrational decisions collide. Was that evolution intentional?

It was. Yeah. So how does it relate to my last book? As you mentioned, John, that is on biases and how we might fall for misinformation. But you might think in financial markets, that could be an arena in which misinformation should not have an influence. Why, you might think, well, there's two reasons. Number one is that in financial markets, the stakes are so high that if you keep trading on information, you'll exit the market, and so it's only the smart people who will survive. Number two, what affects the market are the trades of millions of investors, and so even if we have biases, those biases could cancel out. For example, let's say I'm really bullish on Tesla because I'm an Elon Musk fanboy, and you're really bearish because you can't stand as politics.

Well, I will buy too much and you'll sell too much, and overall prices will be correct. But what I explore in the book is that these are not canceling each other out. In fact, we might both overreact or underreact in the same direction, and therefore, crisis will depart quite a long way from fundamentals. So even in something as rational and supposedly dispassionate as the stock market, we do find these biases really playing out in the same way that we looked in my prior book in many other contexts. When I think of financial markets, I don't really think naturally of human psychology, but in the point, you make this observation that markets don't just reflect information, they do reflect human psychology. If someone watches a financial market long enough,

what would they ultimately learn about human nature? They would find that human nature is affected by biases and emotions, even in something where there is a lot at stake. And this even affects professional people who you might think should be able to act rationally and dispassionally. And so how can that be? How can people who are paid millions of dollars a year still be prone to biases? It's because these biases are so deeply set and deeply rooted in us. And this is because these biases exist in all our human behaviour. So let's take one bias overreaction. We just saw this in the World Cup. So the England manager loses one game and then people say, oh, this guy should immediately fired, even though he leads England to the best finish in a men's world cut since

1966. And then if you apply that to the stock market, people respond to small bits of information. So let's say all birds, a sneaker company, rebrands itself as New Bird AI. The stock market goes up by 582%. Why people will think, well, this is a revolution. It's now embracing the future. This struggling shoe company now has a way of surviving. They don't evaluate. does it actually have the knowledge and expertise to become an AI company? And that itself is not new because in the dot-com bubble, if a company added just dot-com to its name, then the stock price went up by an average of 73%.

So as an investor, as a professional, you think I'm paid a lot of money, I should be responding to information. I shouldn't just be sitting in my laurels. And all of those incentives might cause you to over-respond to small bits of information which are not as meaningful as you think. I feel for that manager because imagine he puts in the players that he did to play defense since they were up and they actually win.

He would have been lauded as the greatest manager of all time. The fact that he put him in and now people are saying that he put him in too early, you're right. It's like we penalize people based on the observation of one thing when we don't look at the totality of how far they get us. And I think it's the same thing sometimes with markets. and how we look at them. I did want to go one step further with this. How do things like hope, fear, pride, envy, regret get underestimated when we look at markets?

Again, I think it's because people think that the financial intents are so large that these fluffy emotional things people should be able to put them aside and just focus on what maximizes financial returns. But I think this is really different. because often people think that they're using those biases to make better decisions rather than thinking their sacrifice and return. So let's give a concrete example. So one bias is the status quo bias or sunk cost fallacy. This manifests in many forms.

In financial markets, it manifests in the disposition effect, which is the idea that we will not take a loss. So if I bought a stock at $100, it's now 95, even though I think it could be going down towards 80, I will not sell this. Why? Because it's just really bad for me to take a loss. And I know I justify this to myself and I don't say, well, I'm doing this because I'm emotional, but because I'm rational, because shouldn't investing be about patience and the coverage of your convictions and taking long-term decisions rather than responding to short-term fundamentals. And so I can rationalise what is an emotional decision based on seemingly scientific and sensible justifications. And so I then stick with a losing stop by telling myself I should be

patient and have the courage of my convictions and the stock goes down to 80 or even worse. Since we were just talking about football, let's go into your introduction of your book, which also talks about football. In fact, a match between France and Greece during the 2004 European championships. What does that story have to do with markets and how you fundamentally think about markets and how it changed your thinking about markets. So let's put 2004 into context. I started my PhD at MIT in 2003 and MIT being MIT teaches you that markets are driven by quantitative stuff. So profits, fundamentals, dividends, it gave the impression that to become a better investor, you need to be a better mathematician, you need to be able to do a solve equations better.

Indeed, the Blackshould's model had roots in MIT, and this is a great Nobel Prize-winning formula to value options. But then in the summer of 2004, I was doing a summer associate position at Morgan Stanley in New York City, 1585 Broadway. This was the European Championship. So two things. Number one, it was soccer, which is not one of the big American sports, and it's the European Championships. It was not even the US participating. And despite that, they were cheers. or sighs or curses, depending on who won or lost.

And these are people who trade for a living move billions of dollars, and yet they are affected a lot by emotions. There was one guy who, after France got knocked out by Greece, he left the office and didn't come back for a few days. And so when I went back to my day, I thought, well, is this just one anecdote, or is this something systematically there in the data? And so then I decided to write a paper with a question that sounded bizarre, could the markets be responding to soccer results?

And I didn't dare tell my MIT professors what I was working on because they might kick me out or just urge me into a different direction. But when I ran the data, the actual data was pretty clear. The evidence stared back at me and it said, well, when a country gets knocked out of the World Cup, the market goes down a lot the next day, even after controlling for world market movements and other determinants of stock returns.

At one time, I had to face the music, so I had to present it to a student seminar, which normally students come to, but then I saw some faculty sneaking in and thinking, well, are they here to look at a train wreck, this crazy student who's now writing about soccer? And then to their credit, they listened with an open mind and they told me afterward, no, I was skeptical, but you've done this well and carefully, and it ended up being published in the Journal of Finance, so one of the profession's top journals. So what this highlighted was that even, even, though you could be doing a PhD in the home of efficient markets, if you are willing to be curious and look into the data, people are open to the idea of psychology affecting financial markets. And so that 22 years ago was the genesis of the book that I've written there. Well, let's also talk about events that are going on right now. I've been a bit surprised that with two major conflicts going on, all kinds of ups and downs in the energy market. that most of the financial markets have continued to rise exponentially under the Trump administration. I would have expected at this point to see some major downtrends.

What do you think is happening? I think there's a couple of things which might be going on. So number one is that economic fundamentals that you think might be negative, they might end up being reversed. For example, we saw this with tariffs, which I thought to be quite disastrous for not only the US, but the world economy, and then the negative reaction led even somebody like Trump, who might think won't listen to anybody. He did listen to the markets and reverse course. So here with energy prices, the market may be thinking, well, actually, if it gets so out of hand

that it really affects production, there will be some intervention here. And even if there's no intervention, I think what history has shown is that companies are remarkably resilient. They might be able to find other ways of doing things. So in the COVID pandemic, which you thought is going to be absolutely utterly devastating. People can't go to work. People found alternatives of being able to work from home. And therefore, while there was a substantial market correction, things recovered much faster than at least I feared that they would take. And similarly here, it may well be then in response to high energy prices. It might be that there's ways of producing it in a different way or saving energy. So businesses are quite adaptable.

recently, as I was telling you before we came on, had the Nobel laureate Auroff on the show to discuss his latest book. And one of the things he and I spoke about has really stayed with me. He said that markets aren't fundamentally about money. There are systems that determine who gets what. Do you have a similar view when you think about markets? So can I just ask, but what did he mean by who gets what? Does he mean the division of a pie that winners and losers, just that I understand. Well, we were talking a lot about, you know, repugnant markets. And we were talking about

when this came up, organ donors. Oh, yes, I know. He's been working back. Yeah. He was specifically talking about how in some markets make it very easy to get organs. And in the United States, for instance, we have to put on our driver's license that we are open to it, which is the opposite. So in the state, I think less people are prone to get organs because of that than in other countries who make it automatic. So that's what we were referring to when he made the statement. Great. Thanks for that context, which really helps. Okay, so he makes some comment about markets in general, and I absolutely agree with him.

So what are markets? There are ways of allocating scarce resources among different people. And if markets work well, then those scarce resources should be allocated to the people who value them the most, such as organs when they are scarce. And then how does this apply to financial markets? I believe it does apply to financial markets in the same way, in that what is the price? The price is a rationing mechanism to mean that the people with the greatest willingness

to pay will be ending up with a resource. And so this is particularly applicable if you think that there's a bubble. So when non-fungible tokens were all the rage, there might be crazy people willing to pay thousands of dollars for a NFT of a tweet. And then what does this mean for us as a savvy investor is to make sure that we think about financial markets like we would do other markets. So in normal product markets, if prices go up, we might buy less. So this is Econ 101. Prices should be a rationing mechanism. But for some reason in financial markets, if the price goes up, we buy more. And that's the opposite of

Econ 101. So Jason's Weig of the Wall Street Journal once wrote an article saying the biggest problem with stocks is the letter T. Why? Because it was socks. The more expensive socks are we would buy less. Whereas with stocks, we actually do something which is irrational. We tend to over extrapolate. And this leads to the bubbles and the herd behavior that I mentioned earlier. So I think there to view actually financial markets in the same way as regular markets, then think about the prices a rationing device, if the price of something has gone up a lot, is it really something that I should be investing in or should I be going for something which is more affordable for the fundamentals that it's giving me? Before we get back to my conversation with Alex, I want to tell you about my

new book, The Mattering Effect, coming October 6. One of the questions I explore is what happens when the environments around us, our workplaces, relationships, and institutions began to communicate that we are replaceable rather than significant. Alex is helping us understand how the systems around us can distort the way we think. The mattering effect asks a different but connected question. What happens when the systems around us distort the way we see ourselves? If that idea resonates with you, you can learn more about the mattering effect at mattering effect.com. Now, a quick break for our sponsors. Thank you for supporting those who support the show. You're listening to Passion Struck right here on the Passion Struck network. Now, back to my conversation with Alex Edmonds. I wanted to do this walkthrough to open this up because

the book organizes itself and you've already talked about one around three distortions that fundamentally shape markets. You have overreaction, underreaction, and misreaction. And I wanted to ask through that lens, once emotions become contagious inside the market, what determines which one of those distortions happens and then allows that either to be collective intelligence or destructive, collective panic inside the market? Yeah, so this is a really good question because many defenders of efficient markets argue that, yes, there are lots of biases, but those biases will cancel out. If I overreact and you underreact, then on average we're going to get to the correct reaction. But what psychology suggests is that when somebody overreacts, everybody overreacts in the same direction,

and then when people underreact, they might all underreact in the same direction. So your question then is, what are the types of things that people as a whole overreact to, and what are the things that people as a whole underreact to? And one thing I think which determines this is the salience of the information. So something which is front page and flashy and more quantitative, it might get a stronger reaction. For example, a rebrand from Allbirds to Newbird AI, that's something which makes big news. Adding.com to your name also makes big news. Those are things which might lead to a lot of hype, people just buying stocks too much.

Something which might lead to underreaction is off the front page. So some of my other work looks at the importance of employee satisfaction. So it makes sense that corporate culture and happy employees matter for a company's long-term value. However, it's very difficult to announce in a press release, our employees are happy. I've not seen any press releases like that. And while there are measures of employee satisfaction such as glass door reviews or the list of the hundred best companies to work for in America, they don't get released with as much fanfare as you would have a rebrand.

they're not as salient to investors as an earnings number, which you can plug directly into a spreadsheet. So if something tends to be more qualitative, it might be more hidden. And it's not just hidden to me. It's hidden to you. It's hidden to other investors because naturally we like to plump for something which is flashy and visible. So then the message of the book is to say to identify things that are more salient and more likely to be overreacted to. And therefore, to educate the reader, don't trade on the same. those things because they would have ready been priced into the market. And then it highlights the

quieter stuff, which might be the hidden treasure, and those are the things that you should be using if you want to try to beat the market. Alex, I'm going to do an ad lib. I wasn't planning to ask this question, but something you just said triggered it. Earlier today, as I was doing research, I watched your TED Talk, and you were talking about pie in it and how companies look at the pie and often gravitate, if I'm summarizing correctly, to extracting value from customers for the benefit of the company itself. And you were talking about Vodafone in it. But one thing that connected with what you just said is you were talking in this TED talk about those companies that have the best policies around how they treat their employees. And so something I have really been

trying to look at in my own work is companies are talking more and more about disengagement, but to the point you just made, they're not really looking at a return on mattering. So if you really make your employees feel like they matter, like they're seen valued in the company, how does that impact performance? Is that something you're studying at all or doing more research towards as you think about how this impacts companies and their success? Absolutely. This is something that I started about, again, 20 years ago during my PhD, but it is something I'm working on an ongoing basis. Again, during the PhD, I wanted to look at what drives long-term returns. And while colleagues would be looking at the tangible stuff, I had been at Morgan Stanley and seen that human capital really matters.

And it matters even in an industry where it should not. because in investment banking, rational economic incentives should be enough, right? When you join at 21 years old, you're given significant bonuses for somebody that young and the prospect of promotion to associate and vice president and executive director. So really feeling shouldn't matter. Even if my boss doesn't invite me to a meeting or mistreats me, I should just work hard because I'm so obsessed with getting promoted. But that's not true.

It's not true for me and not true for the people I interact with. they're all humans. And so we reacted a lot to whether the boss went to the meeting and bothered to spend five minutes debriefing you and thanking you for all the work you did, even though you couldn't go to the meeting yourself. And so when I was trying to study what drives financial performance during my time at MIT, I wanted to look at the human factor. And what I found long story short is that companies that treat their workers really well, as measured by their inclusion and the best companies to work for. They beat their peers by 2.3 to 3.8% per year for a 20 year period and further test suggests it's more likely that employee satisfaction causes financial performance rather than

financial performance causing employee satisfaction. So that was something I did. I started 20 years ago, published in 2011. Then I did a follow-up study extending it from the US to around the world. And now in some current work, I'm looking at what specific dimensions of employee satisfaction matter. In particular, I'm focusing on equity and inclusion. Why? DEI is something which is quite topical nowadays and topical and controversial in that people say, well, DEI is always going to be improving performance. And then you have the anti-DEI people saying, this is just crazy.

It's discriminatory and unmeritratic. But all of that debate surrounds the D, which is often viewed as demographic diversity. And then I can see if you focus DEI on just demographic diversity, how sometimes it could be undemocratic. If you were to say, well, the US men's national team has to have X percent of Asians on the team, well, that I don't think would be meritocratic because you're not selecting the best players. But then if I focus on the E and the I, the equity and inclusion, that should be less. polarizing. This is about making workplaces, ones in which employees can thrive and express themselves and challenge their seniors without fear of repercussions. And so what my cause is I find

is that measure of equity and inclusion is much more linked to financial performance than purely demographic diversity. So again, this goes within the theme of what we just talked about, is if you look at the more qualitative intangible measures, those are things which are often under the radar screen, whereas people who focus on DEI, they will only look at, say, the headline percentages of women or ethnic minorities in the workforce, not these broader inclusion issues. Yeah, thank you for sharing that. From my experience, from working inside these Fortune 50 companies is that I think the companies that do not practice where I think you're getting at is diversity of thought end up creating these bubbles where everyone has group think.

And I always thought the companies I was in that allowed for diversity of thought and other people's opinions on where the company should be going really had better outcomes. And it's probably why when you look at the Fortune 500 from 20 years ago, 50 to 60 percent of those companies don't even exist anymore because I think they have too much group bank. And they don't keep along with the times and anticipate the future because they become too tied to what's origin. worked and not what's going to work in the future. Absolutely. And when you link it to our early discussion, because we have these biases, we want to have people who are going to counteract those biases, not amplifying them. So it could be that I'm male and my colleague is a female, but if we both went to the same university and think the same way, we're going to be amplifying actually to have somebody with the same demographic background as me, but from a different educational background, he's going to be more likely to see my blind spots. Well, let's talk about how things become terrible investments once expectations become unrealistic. And I want to go back in time for this one because one of the best stories I thought you had in the book

was about even the man who discovered gravity couldn't escape financial gravity. So can you share with us why you decided to pick Isaac Newton to focus on in the book? Absolutely, because Isaac Newton was obviously an extremely small. person. And what I wanted to highlight is these human biases are humans. So they will affect any human, even one of the smartest humans of all time. And so what did Isaac Newton do? He invested in the South Sea bubble. So this was when there was the promises of untold riches by the UK trading with other countries. And so this caused the stock market to rise. He made some money and sold out. But then he decided to come back in for one last fling and bought in at the very top.

And then he lost several million pounds in today's money. So even though he should have walked away, the idea of, oh, I don't want to miss out. I won once and I could be winning again. That is something which is very alluring. And it's alluring for just anybody. So you could have made money on the stock market once. You think you're a genius about this. You go in even deeper and they end up losing even more than you want.

the last time. And how does that tie to the concept of anchoring? I've been recently rereading, thinking fast and slow by Danny Canaman. And I know that his work with Tversky, they really examined how people estimate things differently depending on whether numbers are presented, ascending or descending. What does this have to do with markets? Yeah, so I think anchoring, it could be linked to the overreaction that I mentioned earlier. So one of Canaman and Fursky's famous experiments, they took a series of numbers and they are participants to try to multiply them. So one group saw 1 times 2 times 3, times 4, times 5, times 6, time 7 times 8. And the other group saw 8 times 7 times 6 all the way to 1.

Now the answer is 40,320, but the participants were not even close. So those who started with 1 times 2, they estimated 512. those who started with eight times seven, they guessed 2,250, so over four times more of the others, just because they saw the eight times seven first. And so this was a very famous study highlighting and clinging. We just look a lot at the most salient bits of information, which may well be the numbers that came first, the eight times seven, versus the one times two. And so then how does this play out in financial markets, is that we may over extrapolate.

So if assessing a company depends on looking at 10 years of past performance, we might just focus on the last quarter because that's in the news and that's what we're hearing about. And even if that last quarter was a very lucky quarter, maybe it's a bookstore and the last quarter was the fourth quarter. And obviously sales are going to be higher because of Christmas. We forget that. We don't look at the more long-term trend. We just latch on to that last quarter, just like an England football fan. and would be looking at Thomas Tuchel's last result rather than all of his wins before them. Thank you for sharing that. The next thing I wanted to talk about was moods,

because one of the things that you explore in the book is that markets absorb collective mood. So how does this pertain to crowds? If you have a collective crowd that mood all of a sudden becomes remarkable. irrational. What happens then to the markets because of that mood? What happened is that the market may move significantly away from fundamentals. And so this is actually quite counterintuitive because there are arguments that crowds should lead to wisdom and collective intelligence. So there was a very famous book called The Wisdom of Crowds by Jane Surawiki. And what he started with was an example of a county fair where you have

had to guess the weight of an ox. And so many of the people who came to county fair, that they're not farmers, so they have no expertise in this, they might be running a cafe. And so they submitted their bids. And some guests too high, some guess too low, but the average guess was actually very close to the actual weight of the ox. And so this highlighted how crowds can be wise because you're looking at people's collective intelligence, and while anybody could be individually off, these biases cancel out. But this is actually not the case in financial markets, which is why I gave a different answer to your question. Why, I think there are two things which are different in financial markets. One of them is biases and psychology

is that nobody gets emotionally attached to the weight of an ox, but we do get emotionally attached to particular companies. So maybe electric vehicles. We want electric vehicles to succeed. We see them as a solution towards climate change, and that's why we might all be overbidding, companies and that's why they were in a bubble in the early 2020s. The second is heard behavior. So when you submit your bid, your estimate of the oxys weight, you do that in secret. But right now, you can see what everybody else is doing. If you are chatting to your friends, it might be that you hear that they are into Bitcoin and you don't want to be missing out. It could be that you're speaking to colleagues, particularly if you're a trader yourself.

or you could nowadays talk to people that you have no idea who they are. So if you're on Reddit and you go to the Wall Street Betts Forum, then it stings to be the lone person downvoted because you're somebody exercising caution about artificial intelligence. And there have been experiments like Solomon Ashes experiments on conformity where we will conform to even random people because it stings to deviate from the crowd. And so this is why, rather than leading to collective intelligence,

actually crowds could lead to collective folly. If some people have said something wrong, then others follow. That could be the equivalent of somebody shouting smoke, fire, in a theatre and everybody leaves that theatre, even though there's no problem. It seems like what you're saying is that oftentimes markets have been driven more by compelling stories or fear of missing out or other things like that rather than underlying fundamentals. So why does that make the narratives that we hear so much more persuasive? sometimes than the evidence that's right in front of us.

Because people love stories. And this has been here since maybe the dawn of humanity is before we had writing, we had the oral tradition where people would explain things through stories. So if you wanted to tell your children not to go walk too closely to the river, you don't explain that, oh, if you fall into the river, you will drown because the oxygen content of water is, less than of air, you will say, well, there's a sea monster who'll come and gobble you up.

And so that's much more compelling. And so right now, we love to hear stories. And so if you hear about that friend who made double their money on crypto, that is really salient compared to a statistic that the average person loses money on crypto. So if the story is from somebody salient, it could be an influence, it could be your friend. You think, well, that could apply to me right now, even though that story is irrelevant because what happened to crypto over the last six months is not a guide to what it will do over the next six months. So we latch on to stories and we put too much weight on them compared to the power of large-scale data, which combines maybe a thousand data points rather than just one.

And Alex, I have to tell you, I've been susceptible to this as well. I have a really close childhood friend who has killed it in the crypto markets. He's made 50 or 60 million, but it's all he does. And where I have lagged behind him is since he's day trading and is constantly looking at the ups and downs, he's able to get in and out on a quick basis. Whereas I am looking at it more from a long-term perspective, so I miss some of the trends that he sees. But it's interesting how I followed his guidance and thought, because he could do it, I could do it too. You're right. It's we sometimes see things like that and think just because they did it, we can get into it too.

So stories at times can lead to financial downfall, as they did in my case. Yeah, absolutely. And we often don't realize differences between us. So he's able to look at this every day, whereas you're doing other things. Or you can have just different investment objectives. So maybe he's able to take an extremely long-term perspective. You might be concerned with your more, mortgage being refinanced next year. And so you might not be wanting to make the same investment decisions because your investment objective is different. Well, I do think this has a lot of parallels to our last discussion because we really went into last time how identity shapes the information we're willing to accept. And I think what we're uncovering here is stories as they relate to

markets really become powerful because they reinforce who we believe ourselves to be. and then influences our decisions when it comes to the markets. Is that a good way to kind of think about this? Yes, absolutely. And we often start with our own vantage point. And then because of confirmation bias, we will interpret data and evidence in support of that advantage point. So if I'm somebody who believes crypto is going to be a revolution,

it's decentralization and democratization of finance, that I'm naturally going to be latching onto stories of Instagram influences investing in this and not realize that there could be, thousands of other people who are investing, losing money, and they're never going to be posting about this on Instagram. And similarly, if I'm somebody who's very skeptical about financial markets, thinking, well, they're just run by a load of crooks, then I'm going to be putting my money into cash. And then this is, to my mind, losing out on one of the biggest inefficiencies in stock markets, which is known as the equity premium policy. So what is this? So the average return on the

S&P 500, let's say in the last. last 10 years it was 15%. In Treasury bills, it was 3%. So that difference is 12%. And you may say, well, that's 12% that's not free money because the stock market is risky. But people have analyzed what should a fair return for risk be? And the actual difference that you get in the stock market is way higher

than whatever should be fair compensation given the level of risk. So the stock market is a good deal over any reasonable time horizon. So in the final chapter of the book, I give 20 simple principles for people to start investing better. And one of them is just play the game. So to invest in the stock market rather than having your money in cash, yes, it may be that they're short-term fluctuations. And yes, I might not like traders or I might be suspicious about the financial industry. But let's put those sort of emotions aside. You are here to invest for your and your family's financial future.

And over any reason the horizon, the stock market is a good investment, particularly. given the power of compounding. Alex, one of the chapters I wanted to spend some time on, and it kind of connects to what we were discussing about earlier is chapter six, because I really found that this was, to me, one of the most important chapters. And the whole chapter revolves around that markets consistently underestimate intangible assets. So earlier we were talking about things in companies like the importance of belonging, matter, and trust, etc. And in this chapter, what you're really saying is that things like culture, innovation, reputation, human capital matter far more than what people give them credit for. Can you unpack this a little bit?

And then I'll ask some additional questions about it. Absolutely. And I'll first start by unpacking it over two separate levels. Level number one is people, Apple will often view the value of a company based on tangible factors. So that might be plants and machines and buildings or something like product sold. Those are things that we can see. We know that Apple is a great company because we can see everybody with their iPhones and iPads. But actually, one of Apple's biggest sources of advantage is the people. And you don't see the people, but it's the people who are not only creating the current iPhone and Apple Watch,

but we'll create future ideas and future products that we don't yet see. And that is where a lot of the value of a company comes from is these intangible factors, such as innovation or corporate culture or customer trust. Then the level two is even if people realize that, and many people do realize, yes, what matters is whether a company is innovative or whether it treats its work as well, we don't know how to measure it. Why? Because we might go back to quantitative metrics.

So we might measure innovation by looking at how much money a company spends on R and D. But the amount of spending doesn't tell you anything about the quality of spending. You could be burning loads of money on Google Glass, which ends up not generating a viable product. Or you could spend your money on something which really does end up outperforming. Again, to use the sports analogy, the teams that spend the most money on players are not necessarily buying the best players. What I want to measure is the innovation output. So there are studies that show when you look at patents, both the quality of patents and also how innovative those patents are, that is a better measure than just already spending. When you look at employees, as I mentioned earlier, people might look at more superficial metrics, such as the percentage of women or minorities in the workforce.

That doesn't capture cognitive and it doesn't capture equity and inclusion at corporate culture, which will allow people to express their different viewpoints. So there's the two levels here. So number one is people don't think that they're important compared to the tangible stuff. And there's number two, there's the people who do think it's important, but we'll still try to measure something intangible using quantitative measures because finance people are naturally people who like numbers and they don't like something which might be more qualitative. So I want to talk next about the environment and how this relates to ET and candy. So in the book, you talk about the movie ET and you talk about two different companies, Mars and Hershey.

And I kind of think Mars got it wrong and Hershey got it right. But how does this all relate to each other? Yes, this is a great question because this is about the power of a brand. Every investor will know, well, the quality of the brand really matters. But what's tricky is, well, how do I measure brand? And in particular, how do I measure brand in a way that other people are not going to notice? So for me now to say, oh, let's just buy Coca-Cola shares because Coca-Cola's got an even stronger brand than Pepsi. Well, people know that, and it's probably already going to be in the price. What this section of the book looked at was the role of movies. So why did I use E.T as is rather notorious now, is that when they were scripting that movie,

they wanted a trail of candy to lead E.T out. And so they initially approached Mars, and Mars turned them down, which, now is seen as bad a decision as the record company who turned down the Beatles, claiming that guitar groups are on the way out. So instead they approached Hershey and the Hershey said, yeah, please use Reese's Pieces, which was not a, which was a nascent product at the time, and this has led to a huge bump in Hershey, Reese's pieces sales. Now, what is interesting is that you know ahead of time what movies have which commercial

tie-ups because they often will release this in a press release. But what studies found is that only once the movie is shown on opening day, does the market incorporate information. So when they see your product being placed in a blockbuster movie, yes, the stock market reacts, because that is again salient. It is tangible. We see in a movie. But if it's just in a press release, it's one of many headlines where others are about new earnings or rebrands to New Bird AI that you're being featured in the movie might just be less salient and so it doesn't get as much attention. So you go from looking at movies in this chapter to later on you're talking about algorithms and

LLMSs. Where does all of this play out in how we need to start thinking about allowing humans to be freed up to focus on nuance and uncertainty and how this relates to investments. investors, markets, etc. This is, again, a good and important question, because you might think, well, in the age of AI, a lot of the inefficiencies that I find in the book, they might go away. So you could get an AI tool to scan all of the news items to look for product tie-ups in movies and form a trading strategy based on that.

And I will admit this, there are certain things that I think AI might be able to look for. But number one, it's important to understand the psychology so that, you can point your AI tools at it. So for me, highlighting the importance of movie ties, that is necessary for you to get AI to exploit the strategy. And number two is I think there are certain things that AI will still not be able to evaluate, no matter how sophisticated it is.

So one analogy I like to use, although it's not in the book, is one of job interviews. So more recently, people are now using psychometric tests in the job interview, and that is something where people think, well, it's going to be unbiased. It's not going to be people looking at their old voice club. They're trying to have some scientific way of looking at that.

But still, we don't evaluate people only according to the psychometric test. We will want to interview people, somebody. Why? Because we know that there's certain things that the psychometric test will not be able to capture. And now people are looking at even broader sources. So the duolingo CEO is now asking taxi drivers, how do this person treat you in a taxi? bad as something relevant. And so in an AI world, when AI gets even better at analyzing things such as even movie tie-ups or patent numbers and patent quality, not just R&D spending, I still think there

will always be certain things for humans to look at. Maybe I want to invest in a retail company. I'm not just going to look at it at sales from my office. I'm going to walk into the shops and see how customers and workers are being treated. I might look at an angry customer and how the customer service deals with this person. And the more AI is able to deal with the quantitative stuff, I think the more human time might be freed up for these other things. And we might have more innovative sources of information, just like the Deolingo CEO asking the taxi driver about whether you should hire that person. I'm sorry, I'm jumping around on you. I'm just going into some of the things I thought were interesting in the book at this part. And one of the things I want to talk about is

section of the book that you have called The Perils of Pedestal. And I'm going to introduce this is I'm a big Philadelphia Eagles fan. And last year, one of our star players got on the cover of Madden 2006. And no one wants their player on the cover of this because there's, and it played out true for him, it seems like the year that they get on the cover of the game, they have one of their worst years. exactly what happened last year. But in the chapter, you talk about Mark Zuckerberg back in 2010 being named Time Magazine's Person of the Year. You fast forward to 26, Zuckerberg. I don't think he'd be on Time Magazine's person of the year. But what does this peril of the pedestal have to do with financial markets? And why did you choose to write about it?

Absolutely. So this is part of Chapter 7, which is on how the market underreact. to very important sources of information. So chapter six, which we just discussed, was underreaction to intangibles, such as employee satisfaction and grand in innovation, and even movie tie arcs. Chapter 7 looks at underreaction to the most important person within the company, which is the CEO.

So we've seen some companies with some great inspirational CEOs, others with people which create toxic cultures, or they overinvest, or they're just focusing on maximizing their bonus. And there's lots of important signals about the CEO, but the market just underreacts to. Why? Either it doesn't notice the information, or it does know the information, and thinks it's good when it's actually bad. And so the Time magazine example is one.

So when your CEO is named CEO of the year, you might think, well, this is great. I want to even more buy into this company because it's got a great leader at the helm. and this is also something where this will mean that other employees will join this company and maybe regulators will back away from finding it. Suppliers are more willing to supply to it. But what the evidence finds is that is actually a lot of overreaction here, where this leads to them, the CEO being seen as a hero and a cult that nobody can challenge them. So the problem with root thing that you mentioned gets even more pronounced.

And it means that the CEO can end up taking board seats, writing books, joining other. They sometimes have suspiciously low golf handicaps because they can get away with behavior that they couldn't have got away before they could become CEO of the year. And so what the evidence suggests is that you want to sell out of these companies where the CEO becomes a star. But because the market here, it doesn't just ignore the information. It reacts to the wrong way to the information. it thinks that this is positive when it's actually negative, this is where there is the hidden

opportunity. Since we were just talking about the C-suite, in your experience, Alex, what do you think separates leaders who create lasting enterprise value from those who simply are creating the appearance of success? Well, I think one important thing is the horizon that they have. And so some of my work is in the importance of incentive horizons. Am I given, say, shares in the company that I cannot sell? for 10 years or 20 years. Because if so, then my incentive is to invest in sometimes unglamorous stuff,

such as corporate culture, developing a place where people feel psychologically safe, maybe tackling my carbon footprint. That's not something that will pay off immediately, but it might pay off in 10 years' time. Whereas there might be other CEOs who are focused on short-term bonuses or even worse, adulation. They might do flashy rebrands or big mega mergers, or they might be concerned about just using the company as a piggy bank. So it was the CEO of Tyco, who threw a, I think it was a $2 million party for his wife's 40th birthday, charging half of it to Tyco. And this really matters.

And what I'm suggesting in this chapter is we can use a lot of these publicly available signals to tell us a lot about the CEO's character. So AI is becoming increasingly sophisticated, even faster than even the experts thought it might. Yet your book really outlines that human judgment remains indispensable. As AI becomes more powerful, do you think markets become more efficient or do our emotional biases simply evolve? I think markets will become more efficient and I think I would be a Luddite or too wedded in my idea of behavioral finance if I was to give a different answer. So I think markets will become more efficient because AI is able to process information better. But I still think there will be a significant amount of residual inefficiency.

So I don't think efficiency can always be perfect because there will always be added sources of information, certain things which the AI cannot handle, such as, say, customer satisfaction, or what is it like to walk into a store and get a feel or a smell for the store? AI might also have its biases that might be putting more weight on quantitative rather than qualitative information. So just in all other fields and all other types of markets, if we are like to be allowed, I'll often expand it to other types of markets. Let's say the sports players market. Yes, people are using moneyball type strategies being inspired by Billy Bean,

but there will always be then advances thinking, well, what is the next generation of statistics which people haven't looked at? So with baseball, I think what Billy Bean was about was looking at walks, not just hits. And then now people are looking at, well, what is the character of this baseball player? Is this somebody who will live up to their potential? or to use the analogy that we just looked at, get caught up in their own hype and think I'm a great young athlete

and I don't need to try anymore. There's been so many stories of people with great potentials which are not fulfilled. That is something with, again, a human with experience might be able to evaluate it better than AI. So I do think AI will make markets more efficient, but I do believe that there will be jobs for professional money managers for many decades to come

because there will be certain things that humans will still be better doing. Thank you. And in the book, you write, about the future being man plus human rather than man versus machine. And it made me think of another observation that Al Roth shared with me. He argued that when we ban markets, we rarely eliminate demand. We simply change where it shows up. And my question to you is, as algorithms begin to make more decisions for us, do you think our biases disappear or do they simply migrate into different

parts of the system kind of following his logic. I think they will migrate to different parts of the system because we all have biases. And if those biases are no longer being used to evaluate sales forecast or earnings numbers, because AI is going to be doing that for us, our biases will then manifest in the qualitative staff that we will be assessing ourselves. It may well be that if I go into a store and then everybody in the store looks like me or has a similar background. I might think, oh, this is a good store to buy in, rather than one in which people might have different backgrounds. We're always going to have these familiarity-type biases.

And so they will just manifest in whatever decisions we give people. Yes, in the post-AI world, we will give people different types of decisions, but there will still be human mistakes and fallacies, which are fallibilities, sorry, that was my own fallibility with that word, and human fallibilities, which will be influencing the decisions that we are entrusted. And then lastly, Alex, if every passion-struck listener, remember just one lesson from the madness of markets, one idea that would help them become wiser in their careers, relationships, leadership, perhaps their lives, what would you hope that lesson would be? See the other side.

And so why I'd say that is you can apply this both within markets and within broader life. Within markets, it may be that I'm really excited about AI and I think that it's going to take over the world I'm going to buy. What is the other side is, well, might this have already been priced in? It's been on a tear for the past few years. Maybe the stock price already reflects this, or maybe there's concerns about it, and there's people arguing that we should be putting the developments on hold before we really know whether this is going to be safe for humanity. And not only can apply this in markets, we can apply this in anything.

So before taking a decision, be this to change jobs, maybe take the other side. Am I just wanted to change jobs because of some microaggression, and I'm just overreacting to this? or to relocate or to break up with a partner. Any decision that I'm going to make, try to look at the other side. And if I can't look at this objectively, get a friend or somebody who you can trust to disagree with you

to make the case for the other side. Alex, similar to your last book, this one is extremely well researched and that research is very well applied throughout the book. And what I took away from reading it is less than the book isn't about outperforming the market. It's about recognizing the cognitive habit. that influence every important decision we make from investing in leadership to relationships in life,

as you were just pointing out. Where is the best place people can go to learn more about you, your work, pick up this book, everything else? Thanks for asking, John. The book is called The Madness of Markets, why smart investors make crazy decisions and how to exploit them will be available in any good bookstore. But my work more generally, I'm very active on LinkedIn in particular, under A-Edmans, that's A-E-D-M-A-N-S. My website, Alexedmonds.com, has my academic research, but on LinkedIn I tend to produce more short-form articles

commenting on a particular situation, so that is a more lighter touch way of keeping in touch with my work. Alex, thank you again for the honor of being back on the show, and I can't wait for your next book after this one. It's a huge pleasure to be back. Thank you so much for inviting me, John. Alex, thank you so much for this conversation. What I keep coming back to is how easily we can confuse what's visible with what's important.

The loudest information isn't always the most valuable information. The most measurable thing isn't always the thing that matters most. And the consensus isn't necessarily the truth simply because millions of people believe it. Alex's reminder to see the other side is deceptively simple. Before you make the decision, ask, what am I missing? What would someone who disagrees with me? with me see that I don't, because sometimes adapting doesn't mean moving faster, it means learning to see differently.

And that brings us to our next conversation. What if one of the biggest things holding you back itself isn't fear itself, but a story you've been telling yourself to stay safe? On Thursday, I'm joined by Scott Simon and Dr. Gregory Stock, the co-authors of the Book of Questions, Courage. Scott is the founder of the Scare Your Soul Courage Movement, and Gregory is the author of the best-selling book, The Book of Questions. And during our conversation, Scott shared one question from the new book that he says cut straight to the core.

In my courage work, the number one area where people struggle the most isn't about physical courage or even ethical courage. It's the ability to ask and answer hard questions. and that comes from deeply inside of each one of us. And I think that's where a beautifully crafted question comes into play. A great question kind of allows us to get below the surface, to connect with deeper parts of ourselves. That's next time on Passionstruck. If this conversation give you a new way to think about your own decisions,

take a moment to follow Passion Struck on YouTube, Apple Podcast, or Spotify, and share this episode with someone who could benefit from it. If you have anything that you'd like to share with us about today's episode, you can do it on Instagram, the Substack, The Ignited Life, or on our other channels. And if you haven't already, check out the mattering effect coming October 6. Until next time, stay passionate, stay purposeful, and stay passion-struck.