In this episode, we welcome back Alex Edmans, Professor of Finance at London Business School and author of Grow the Pie, May Contain Lies, and The Madness of Markets. Drawing on academic research and real-world market examples, Alex explores how emotions, social influence, and psychological biases shape investor behavior—and why even apparently irrational markets can be difficult to beat.
We examine how a country’s stock market can react to a football loss, why investors overreact to exciting stories and underreact to less visible information, and how identical assets can trade at different prices. Alex also unpacks the evidence behind reversal, value, and momentum strategies, the challenges of exploiting market anomalies, and why skewed stock returns make diversification so important. The conversation ultimately returns to a fundamental investing question: even if you can identify market inefficiencies, do you have the edge, patience, and cost advantage needed to benefit from them?
Key Points From This Episode:
(0:01:49) How losing a World Cup match can affect a country’s stock market—and what this reveals about emotion‑driven trading.
(0:03:01) The relationship between weather, sunlight, and market sentiment.
(0:03:49) Spurious correlations and data mining: why an apparent relationship needs a plausible economic explanation and out‑of‑sample testing.
(0:06:42) Wisdom versus madness of crowds: when collective judgments can be useful and when social influence leads investors astray.
(0:09:44) Overreaction in markets, from the pandemic‑era rise of Zoom to the dramatic response to Allbirds’ AI rebranding.
(0:12:06) The reversal effect: why past losers can outperform past winners when investors overreact.
(0:12:53) Underreaction to long‑term information, including research linking strong workplace cultures with better stock performance.
(0:14:57) Misreaction and anchoring: how purchase prices can lead investors to sell winners too early and hold losers too long.
(0:16:50) Value investing and valuation multiples, including why a company’s price relative to its fundamentals matters even when it is widely admired.
(0:22:02) Limits to arbitrage: why investors can be right about a market bubble but still fail to profit from it.
(0:24:56) The importance of investment horizons, illustrated by Alex’s own equity allocation and a fund designed around a 40‑year horizon.
(0:27:55) The illusory truth effect: how repeated information can feel new and move prices, as illustrated by the market reaction to EntreMed.
(0:33:43) Momentum investing: why recent winners may continue winning, and how momentum appears across industries, sectors, and countries.
(0:39:04) The law of one price and examples of identical or closely related assets trading at different prices, including 3Com and Palm.
(1:02:20) The three recurring principles: markets work, diversification matters, and costs matter.
https://community.rationalreminder.ca/t/the-madness-of-markets-alex-edmans-431/43557
https://zbib.org/7d62d23b5efc45f7b0b908b769cbfa92
The Madness of Markets: Why Smart Investors Make Crazy Decisions—and How to Exploit Them by Alex Edmans — https://www.amazon.com/Madness-Markets-Investors-Decisions-Exploit/dp/B0GK117D54
Stay Safe From Scams — https://pwlcapital.com/stay-safe-online/
Rational Reminder on Apple Podcasts — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
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Benjamin Felix — https://pwlcapital.com/our-team/
Benjamin on X — https://x.com/benjaminfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Alex on LinkedIn — https://www.linkedin.com/in/aedmans/
Alex on X — https://x.com/aedmans
Alex’s website — http://www.alexedmans.com
