Why Smart Investors Make Crazy Decisions | Alex Edmans on The Madness of Markets
Why do smart, experienced investors still make terrible decisions?
On this episode of The Money Path, host Todd M. Schoenberger sits down with Alex Edmans, Professor of Finance at London Business School and leading researcher in behavioral finance and market psychology, for a fascinating examination of the forces that can make otherwise rational investors behave irrationally.
Ahead of the U.S. release of his new book, The Madness of Markets: Why Smart Investors Make Crazy Decisions—and How to Exploit Them, Edmans explains why investors overreact to some information, underreact to other signals and repeatedly fall victim to FOMO. He explores why investors can correctly identify the next major trend but dramatically misjudge how quickly it will develop—potentially driving valuations far beyond reality.
The conversation also examines the surprising power of emotion. Edmans discusses research showing how seemingly unrelated events—from sports results to weather—can affect investment decisions, and explains why investors should think twice before making major financial moves when emotions are running high.
Todd and Alex also explore why successful investors can develop dangerous blind spots, why cognitive diversity can matter in investment teams, and why admitting an investment mistake can be psychologically harder than doubling down on a losing position.
Then they turn to artificial intelligence. Edmans warns about the danger of overvaluation while explaining how investors can use AI differently: not simply to find the next winning stock, but as a devil's advocate that challenges an investment thesis, identifies contrary evidence and exposes assumptions an investor may be overlooking.
The takeaway is surprisingly simple: being intelligent doesn't make you immune to bad decisions. Sometimes the greatest advantage an investor can have is recognizing when their own mind is working against them.
