The Madness of Markets: Alex Edmans on Why Smart Investors Make Crazy Decisions

00:00:31 Andrew Keen: Hello, everybody. Last month, we did a show with my old friend, Jeff Jarvis, which we entitled "Citizen Twain". It was about a book, Hot Type: The Magnificent Machine That Gave Birth to Mass Media and Drove Mark Twain Mad. Mark Twain, of course, being one of the great American writers, but not much of an investor. And, it's a book about how, in many ways, Mark Twain lost his fortune in 1894 after his publishing company collapsed under heavy debt. He invested very badly, and that suggests that perhaps one can be a genius like Twain, but not actually invest very smartly. That is the madness of markets, which is the title of a new book by an old friend of the show, Alex Edmans from London Business School, Why Smart Investors Make Crazy Decisions and How to Exploit Them. Alex is joining us from, Wimbledon in London where he lives. Alex, are you familiar with that, Mark Twain misinvestment? Is there—is that the kind of example that you use in Madness of Markets, people? We assume are really smart, but I end up making really dumb economic decisions.

00:01:53 Alex Edmans: That's exactly it. So surprisingly, I wasn't aware of Mark Twain in that context. I'm aware of a lot of things that he's done and written, but the example that I lead the book with is actually pretty similar to Mark Twain. It's another smart person, arguably even smarter. So Isaac Newton, the guy who'd unlocked the laws of gravity and cracked the code of planetary motion, he got caught up in a bubble. So this is the South Sea Bubble. So this is the idea that there will be untold riches because of trade between the UK and South America. And so he went in. He made a tidy profit, but he cashed out. And then he thought, well, let me go back in again because if this is the opportunity to make money, then let me repeat this. And so he dived back in, but he dived back in right at the very top. The market collapsed, and what he lost was £20,000. Now that may not seem a lot, but in today's money, it's £4 million. And when you look back at this, he said, well, I could predict the movement of the stars, but I cannot predict the madness of men. And so this is what the book is about, the mistakes that even really smart people make such as Sir Isaac Newton or Mark Twain.

00:03:00 Andrew Keen: So when it comes to you use smart people, you're a business professor, so you're very smart when it comes to business, Alex. I'm sure you're less smart in other areas of life. Should smartness in one part of one's life as a writer, as a physicist, should that suggest that we're pretty smart when it comes to other decisions, particularly on the financial front? Or does it actually suggest it doesn't matter how smart you are in one area of life, your decision making, particularly when it comes to finance, is likely to be rather dumb.

00:03:35 Alex Edmans: Yeah. The latter, unfortunately. So smartness is very domain specific, particularly when it comes to investing. So what do you need to know as an investor? You need to know the prospects of a company. And how do you get that? Well, you need to know the industry. You might need to talk to management to walk the shop floors and understand the company culture. But, equally, you need to know what is already priced into the market because you can only beat the market if you have a different view from market expectations. And so you could be a fantastic scientist. You could be a fantastic, athlete. You can be fantastic in many, many other fields. But if your knowledge is not specifically on that company, then you might not be able to beat the market. And that applies to me as a finance professor. So what I am smart at, presumably, is doing valuation models given some inputs, but I might not have unique information to gather those inputs. I'm not speaking to management every day. I'm not going to industry conferences trying to figure out the likely growth rates of the semiconductor industry. So to recognize that we are trading against smart investors whose day job it is to analyze this data and to price companies and to speak to management makes us more humble and more realistic about our ability to beat the market.

00:04:50 Andrew Keen: But do you think smart people are particularly vulnerable? One of the examples that comes to mind, I'm out in Silicon Valley, is the case of Elizabeth Holmes, who, the Theranos founder went to jail, a big-time fraudster. She took particular advantage of smart men, Henry Kissinger, for example, or George Shultz. I think some of these men were probably half in love with her. Are smart people particularly susceptible because they think they're smart, so they just assume, like Kissinger or Shultz, that they should be investing in a company like Theranos that was essentially just a fraud. Not essentially. It was a straightforward—

00:05:34 Alex Edmans: Yes. Absolutely. This is the Dunning-Kruger effect. The fact that a little bit of knowledge is a dangerous thing. You think that you know more than you do. Why? You might be misapplying your smartness. You think I've been successful at this area, and therefore, I will be an expert in investing, but it could be you a great secretary of state or a big CEO of a company, but that is quite different to evaluating this potential health care company. Can it actually diagnose lots of illnesses from a finger prick of blood? You might not know this. And let's say you do believe you have domain specific expertise. I was a physician. I can evaluate our pharmaceuticals company. I can assess whether this beta-blocker drug is going to be effective. Well, that is only one piece of the overall mosaic. What I also need to look at is what are the competitor drugs, what is the likely demand for this, how much will people be willing to pay, what are the regulatory headwinds or tailwinds in terms of drug pricing, a lot of those other factors. And so unless I'm able to look at those different pieces of the mosaic, it may be better off that I will give it to a professional investor or indeed held an index fund.

00:06:42 Andrew Keen: So are you calling for humility, Alex? The investor who comes to mind, I'm sure you bring him up in the book, is Warren Buffett. Of course, I'm guessing probably the most successful investor in modern history. He seems to be defined not by arrogance, but by humility, or are we just judging people from success? If they're successful, then we just assume they're humble.

00:07:09 Alex Edmans: Yeah. So I think Warren Buffett is a great example, and you're correct. I mentioned it many times. And so what he highlights is what his edge might be and what his edge might not be. So many investors might think, well, I'm great at processing information. Every time there was news, I want to act on it. You snooze, you lose. But one of Warren Buffett's big pieces of advice is just don't look at the market too closely. It may well be that you're mistaking noise for signal. So what he might define as his investment edge is the ability to understand intangibles and to invest in companies with a strong brand, take large stakes in them, and give them time to invest in those brands and those intangibles, protecting them from the vagaries of the stock market. But this is linked to a broader point. If you are to play the market, know your edge. Define what your investment edge is. Your edge could be knowledge. You might have unique insight about one sector or one company, or instead your edge may well be endurance. And what do I mean by this? It may be that as an individual investor, I'm investing for myself. I don't have outside money, so I'm able to take long term positions. So one example is Clare College Cambridge University. So in 2008, this was in the depths of the financial crisis. It took out a £10 million loan and put that all into equities. Now that was really dangerous because it wasn't clear that was the bottom. It may well be that the market would have gone down even further. Now if you are a mutual fund with flighty capital, you invest and the market goes down more, then people will just withdraw from you, because you're underperforming. But Clare College Cambridge didn't need to worry about that. They were able to take a long term perspective. They are investing for forty years to fund future research and teaching. The fund they set up was called the 2048 Fund. And, indeed, because the market was so depressed in 2008, the equity portfolio went up from £10 to £30 million over the next ten years, whereas the loan they took out only went from £10 to £20 million. So if your edge is I can have endurance, I've had long term perspective, that's another reason why you might want to play the market. And there might be further sources of edges that are too long for me to mention here. But unless you can define your edges and why this is something that you have that professional investors may not have, then maybe the best thing for you to do is just to be humble and to have a low cost globally diversified index fund.

00:09:43 Andrew Keen: I wonder whether your message is about crowds. The book is called The Madness of Markets, and, of course, it brings to mind Charles Mackay's famous book, Extraordinary Popular Delusions and the Madness of Crowds, a book also about bubbles, the South Sea Bubble, the tulip craze in six—in seventeenth century Holland. Should we be are you arguing in the madness of markets that we need to particularly in our social media age where we all seem to be intoxicated by one kind of crowd or another, we need to shut us if we wanna be a smart investor, we need to shut ourselves away in a room away from the crowd?

00:10:30 Alex Edmans: Yes. Because, often we think that crowds may be wise. So just like there was the book on the madness of crowds, there's an alternative book, The Wisdom of Crowds that—

00:10:39 Andrew Keen: —came out. James Surowiecki, which, actually, we I talked about earlier this week, in a conversation about Kalshi and Polymarket, which we'll come to in a few seconds.

00:10:53 Alex Edmans: And that's a really good book, and it's been very successful, but I don't think it applies to the stock market. So why? So the idea of the wisdom of crowds is that, well, each individual person might make a mistake, but when you aggregate them all together, you get closer to the truth. So he starts off with an example of guessing the weight of an ox at a county fair. And there's lots of random people who come to the fair. They have no expertise in ox, and they're not farmers. And some will guess too high and some will guess too low. But when you average their guess, they got very close to the answer. But why this doesn't work in the stock market is for two reasons. Number one is emotion. So nobody gets emotionally attached to the weight of an ox, and, therefore, it is fair to think some will bid too high or some will bid too low. But in the stock market, there will be emotional attachment to many things. For example, in a bubble, let's say, the tech bubble of the late 1990s, many people were thinking, oh, this is gonna be the future. I want to invest in this. And if there's overexcitement about any type of bubble or fad, then it won't be that some are bidding high and some are bidding too low. Everybody is bidding too high, and that's gonna drive the market up. The second reason why the county fair is not a good analogy for the stock market is when you choose your the weight of the ox, you just guess this in secret. But stock market investing is not secret. So a lot of people will just share what they're trading. It may be that you're on Reddit, and you see everybody else is buying cryptocurrency, or your friends are boasting that they made money on crypto or some random social media influence.

00:12:38 Andrew Keen: Or NFTs, of course. I know you write about NFTs in your book.

00:12:43 Alex Edmans: Yes. And lot lots of snazzy things where it is possible to make money on isolated cases. But if you're an investor and you look at these success stories, you don't realize there could be loads of other people who bought NFTs and failed, and they're just not, showing this, then you might be swayed by other people. You want to copy them. You have the fear of missing out, and so you go in not because you've understood the actual market and the economics of NFTs or crypto, but because everybody else is doing this. And so this is why you can have big fads and bubbles where everybody is acting in the same direction. They are copying each other, and they're also swayed by psychology and over excitement about a new hot sector, be this AI or tech or a new asset class like NFTs or crypto.

00:13:29 Andrew Keen: Yeah. It's interesting. I've got some friends who are big gamblers. And when you talk to them, you only ever hear about their wins, their big wins. And, of course, they never boast about their bad bets. Talking about the dot-com bubble, Alex, I was around in San Francisco. In fact, I was an entrepreneur in the nineties. I had my own startup. And the common wisdom back then was that the market was about to crash when cab drivers back in the nineties. Of course, there were cab drivers. This was before Uber. Cab drivers talked to you about their investment in Yahoo. But you're actually suggesting the reverse is when you go to fancy cocktail parties and smart, successful people start telling you about how much AI they're buying or Yahoo or one other fad or another, you should probably start rethinking your investment strategy.

00:14:24 Alex Edmans: Yes. Because the concern here is that if people are in on the trade and investing in, say, tech, then it's more likely to be richly priced. And if these people are very liberal about it and telling others around about it, then it could be that others have been influenced by them and are also going in the same direction. So what this means is that if you are an investor with patience and a long time horizon, it may well be that you want to be contrarian and to take the other side. Why? Because even though there is a chance that the bubble can keep inflating, in the long term, if you think a lot of people have just got in on this trade because of mimicry rather than analyzing fundamentals, then maybe the long term path is down. And, indeed, contrarian investing, value investing, this is a strategy pursued by people like, say, Warren Buffett or his mentor, Benjamin Graham or others like Joel Greenblatt, just finding stocks that are really in favor and avoiding them and others that might be out of favor and buying them.

00:15:24 Andrew Keen: Earlier this week, we did a show, what, Finn Brunton in, Harper's Magazine called The Chaos Machine. It's about, platform gambling, Kalshi, Polymarket. Kalshi's tagline is "trade on everything". They're suggesting bet on everything. Your book is about investment, formal investment. But don't we live in an age, the age of Kalshi and Polymarket, Alex, where everything seems to be gambling, it's harder and harder to distinguish between the formal stock market and platforms like Kalshi and Polymarket.

00:16:07 Alex Edmans: Yeah. And this is one of the motivations for writing the book and why to write it now is that now is the age of investing. So maybe twenty years ago when I started my career as an academic, only a small fraction of the population may have invested in individual stocks. You needed to go through the effort of setting up a brokerage account. This was seen as something for sophisticated people to do. And if you were to do this, you would be investing mainly, let's say, in US equities. Now we've democratized the stock market. We've actually democratized the market for many different assets. So it could be that you're using a platform like Robinhood. You don't even need to log on to a website. You can just use an app. You're now able to invest in not only stocks from all around the world, but options and NFTs and crypto. And so it is something where people think I can invest in anything in terms of in any asset class and on anything based on any type of news. So it's very tempting to think, oh, I've seen the news. There's been a good earnings announcement. I'm gonna buy this company, or I've seen Trump make some statements about tariffs I'm gonna be selling, not knowing that the market may have already reacted to that. And, actually, you may well be overconfident. And, also, when you do trade, you may be paying commissions. And you might think, well, you're not paying commissions because aren't many of these platforms zero-commission platforms? Well, they might advertise themselves as zero commission, but you're paying through the bid-ask spread. And often in the shiny and new asset classes, these bid-ask spreads can be large. So in the retail options market, they could be as large as 20 to 25. So you've lost that much of your investment just from time zero just as soon as you bought because you've bought at a much higher price than what you can sell at. So this is why I wanted to highlight this cautionary tale. So I'm generally a libertarian. I like people being free to make decisions and the government not intervening too much. But when these decisions may jeopardize your financial future because you could be investing in assets that you don't know or based on information which is already priced in, then this is something to be very wary about.

00:18:15 Andrew Keen: In our conversation with, Finn Brunton, we talked about the way in which platforms like Kalshi and Polymarket are essentially opportunities for one kind of crook or another to take advantage of their inside knowledge. Everybody seems to know this, and yet everybody goes on these platforms. So aren't you, in a way, warning, Alex, in your book, The Madness of Markets, about human nature? We just always think we're smarter than other people, and even if we acknowledge that what we're doing is risky, people will always say, well, I understand that, and I know more than you, and I will do behave accordingly. And often, you lose your shirt like, Mark Twain, or, Isaac Newton. So I know you're a business professor, but aren't you really dealing in this with in this book and in this conversation about human nature?

00:19:15 Alex Edmans: Absolutely. And this is the common theme with all of my writings. So in our previous conversation, we talked about my prior book, May Contain Lies, on human nature, how we believe information that we want to be true, and we will shut out information because it contradicts our worldview.

00:19:31 Andrew Keen: Yeah. And this is from your 2024 book, May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases and What We Can Do About It. The book was a big success.

00:19:41 Alex Edmans: And while that was based on confirmation bias and other psychological mistakes in many, many different fields, here, I wanted to focus on one topic, investing. Why given its importance, given that investing is something that many, many people can do nowadays when it was only something that maybe a small fraction of the population did in the past. And so it is just really important to understand the mistakes that we make and the biases that we are suffering from to make sure that we are not making the same mistakes. And one of the key biases is one known as overconfidence. So if you ask people, are you better than average at your driving ability, 90% of people will claim to be better than average. If you ask them about, say, their ability to get along with others or their sense of humor, again, 90% will be claimed to be better than average. Well, obviously, statistically, only 50% can be above median. And so what this means is that when you are trading on the stock market, you typically think you have unique insights, which you do not. Now interestingly, in the other fields that I mentioned, it is not too bad if you are deluded. So I might think that I'm a better than average driver, but maybe as long as I'm not in the bottom 1% of drivers, I can get home safely from work. I don't need to be an above average driver. So even I'm deluded about my ability, I can still drive safely as long as I'm not an absolutely terrible driver. But to beat the market, I do genuinely need to be above average. So if I'm overestimating my ability relative to other people, then I am trading when I should not. And indeed, there have been systematic studies looking at retail brokerage accounts, which suggests that when people trade, even before fees and commissions, the average trade loses money. And then when you add on fees and commissions to that, they're losing even more.

00:21:38 Andrew Keen: I always think I'm a bad driver, but the fact that I haven't had any accidents might suggest otherwise. Maybe you should always assume the worst about yourself. What about marriage, Alex? Do you think that many men and women I mean, marriages, of course, notoriously, half of them break up, and they generally create a lot of misery. Do you think that the advice you're giving in Madness of Markets should be applied to human relationships when it comes to husbands and wives, for example?

00:22:06 Alex Edmans: Yes. It should do. I think that the statistic is that is at 50%, as you say, of the—

00:22:10 Andrew Keen: It's around 50. I don't know whether that's exact, but it's approximately then.

00:22:15 Alex Edmans: And I think it has been going down over time certainly in some countries, but this may be because I think people are tending to marry later. And this might be a rational response to the 50% divorce rate is if indeed we realize, actually, many people are making mistakes. Let's make sure that we know who we're absolutely certain about who we want to marry, before, going into a long term commitment. Other people might say, well, let's have a prenup or some arrangement if the marriage resolves. And while some might think, oh, this is just really unromantic, it may be prudent because if now, let's say, the statistics are still 40% of marriages end in divorce, it is good to plan for that eventuality.

00:23:01 Andrew Keen: Does it extend to ideology as well? Another recent book entitled The Madness of Crowds, Gender, Race, and Identity by the conservative English writer Douglas Murray. It's a right wing conservative book, but suggests that the madness of crowds created the insanity of the woke movement. I guess you could get, left wing, books, arguing the reverse or accusing, conservatives of playing into the crowd too. Does this extend to how we think broadly, Alex?

00:23:40 Alex Edmans: Yes. It may well do. And this is linked to I think this is more the topic of my prior book, but I'm absolutely still very happy to talk about it because all about human psychology is how we are swayed by ideology and group identity. Let's take, for example, climate change. So that should be an issue of data and evidence and science, but has become, particularly in the US, a left wing versus right wing thing. Why? We take the documentary An Inconvenient Truth, which many people believe was factual and full of data and evidence. But because it was associated with Al Gore, many Republicans think, well, I am not a true Republican unless I believe that climate change is a hoax and is not manmade. And so when there's particular positions which are associated with an identity, I might want to ignore the evidence inconsistent with my prediction because I want to be really strong and true to my identity. We have seen this in particular with the, Jason Arday case, within the UK. Yeah. So this ended up very, very sadly where the academic sadly committed suicide [ed.: at the time of recording, police had described the death as unexpected but not suspicious; no cause had been officially confirmed]. And I absolutely do not want to trivialize that. I just want to focus on the what this debate was about. There was concerns that he had plagiarized, his work. And then immediately in reaction to this, there was quite partisan either support of him or condemnation of him, and this was often on party lines. So, typically, ethnic minorities, particularly African American or the black community would support Jason Arday because of his identity rather than actually looking at the evidence dispassionately. And on the flip side, you had right wing people saying, oh, this is DEI being a sham. Again, basing their views on their position rather than trying to have an objective look at the evidence.

00:25:33 Andrew Keen: Alex, you're an expert, a professor of finance, best selling author, expert on the investment world at the London Business School, one of the top business schools, in the world. We live in an age where experts like you are being challenged by AI and by one kind of populist ideology or another. Is this book, in its own way, Why Smart Investors Make Crazy Decisions, a defense of financial experts and expertise. My wife and I have a financial advisor who is incredibly boring, but also very wise. Should we be listening to our advisors better, who are much more dispassionate, much less bound up, with their own sense of genius, especially, in big banks?

00:26:27 Alex Edmans: So I think it is in defense of some experts is to recognize that true expertise is important in many domains, including investing. And even if you think you're very smart because I'm a great business leader or a great writer or journalist or scientist, this is not domain specific expertise. You really need to understand what drives the stock market, what drives company performance, what's already priced in, and then have an understanding of investor sentiment. However, it's not a defense of all the experts because experts themselves may be fallible or experts may have different objectives. So some financial advisers, depending on their compensation structure, they might put you into high commission vehicles because they're paid according to commissions, or, they might take more short term perspectives because they are more worried about retaining your business in the short term rather than taking a contrary strategy that is going to pay off in the long term but risks some short term turbulence. And the same might be true of experts such as me. So I have my own biases, and it may well be that, you want to speak to other people with views on the market. So my view is that markets are inefficient and that there are systematic mispricings, but there are other even more famous way more famous economists than me. Let's say Eugene Fama who won the Nobel Prize who believes that markets are efficient, and he said he might say, well, some of the miss of mispricings that I noticed could be statistical anomalies in the sense that even if a coin was fair, if you tossed it 100 times, you would see streaks of five heads. That's just random. That's just, the product of luck. So I think on any field, don't put too much weight on one particular expert. He or she may have different objectives if it's to maximize commissions. And even if they are trying to be objective, they will have their view own viewpoint, which might be shaped by their own research and experiences. So if there's experts on the other side that you can try to consult, then you will see a balanced picture.

00:28:33 Andrew Keen: Yeah. It sounds as if in some ways you're supporting contrarianism. I mean, could we reverse the subtitle of your book? The book is called The Madness of Markets, Why Smart Investors Make Crazy Decisions and How to Exploit Them. Might we reverse that and say why crazy investors make smart decisions and how to exploit them? In other words, it requires a degree of craziness.

00:29:03 Alex Edmans: Yes. I think you could. And I think this is something that you could see as relevant not just in investing, but many of, walks of life. So, a crazy businessperson might be somebody who sees potential in something that nobody else saw. So Henry Ford was, set of, made the statement that if people are I asked people what they wanted, they would have said faster horses, and he said, well, let me do something different and mass produce the car. Moneyball by Michael Lewis was about, Billy Beane, the manager of the Oakland Athletics. He said, well, everybody else is looking at, the number of hits that you get. I want to look at walks. And that is more contrarian.

00:29:45 Andrew Keen: Although he never won a World Series, I think, with the A's. Steve Jobs, of course, famously said that, before he designed the iPhone that, he never gives people what they want. If he did, then none of his products would have been very successful.

00:30:00 Alex Edmans: Yeah. So here, what you want to do, if you want to have a competitive edge, you want to do something that the rest of the people are not doing. So that does require some craziness, some willingness to go against the grain.

00:30:12 Andrew Keen: Well, what people, I think, you're really suggesting Alex should do is pick up your book, The Madness of Markets. That will make them less mad. We live in strange times. We've got the Financial Times, writer Robin Wigglesworth coming on the show. He has a new book out on AI. He has a interesting piece in the New York Times, an op-ed, last week. This is "How the AI Debt Binge Sinks the Economy". A lot of fear about AI. How does AI play into your arguments in two contexts? Firstly, of course, are a lot of smart investors pouring money, massive amounts of money, into AI? Is that, in your view, at least a crazy decision? And secondly, how does AI as a technology, shape or reshape the madness of markets? Can we use AI? Should we be considering using AI as our adviser, or should we be wary of that too?

00:31:11 Alex Edmans: Yeah. So that's a great question on two levels. And let me start with the second level first, the use of AI investing decisions. I do believe it can be really powerful if it's used in the right way. So what is the right way? So let me start with what the wrong way might be is I would like to invest in a particular company, and I ask AI just to find me information as to why this company is a good investment just so that I can, confirm it to myself that just classic confirmation bias. Or it may be that I'm working in an asset management firm, and I need some approval so that I need to be able to get this approved by investment committee, and I'm gonna ask AI to be an advocate for me to give me the arguments to take this to investment committee. The more correct use of AI is to be contrarian. The theme of our conversation for AI to say, well, why am I wrong? So it could be that I want to invest in, health care, and can AI can give me a lot of reasons for why investing in the health care sector might not be good right now? Now I'm not gonna take this at face value, but I might try to evaluate its claims. AI could also just gather information much faster. So it might allow me to put together more pieces of the mosaic. So rather than just looking at, say, financial metrics, it may be able to give me some information on stuff such as corporate culture by scraping Glassdoor reviews. So then the question is there ever a role for humans in an AI world? And I believe there still is. It is to assess that information while AI can give me the individual pieces to form an overall assessment based on the fact that products are great, but the culture is bad. The management's a bit shifty. Do I still want to buy? There a human will be needed for that. There might be certain types of information that AI is unable to gather. So if you are walking the shop floor and seeing how customers and workers are being treated, if you meet management on a one on one and figure out whether they're trustworthy or not, or if you see the dynamics of the top management team when you ask them a question, those are useful things that a human can add value. So AI is a useful tool, but it's something which is most useful in combination with humans. The first level of the question, is AI itself a bubble? And here, I'm gonna be a bit more circumspect. So there have been certain times where there has been clearly a bubble, not just with hindsight, but at the time, reasonable people could have called it a bubble. So Cisco in 2000, its price-earnings ratio was 190, which was, I think, triple Microsoft's and four and quadruple Intel's. But right now with AI, yes, it's true that the AI sector's done extremely well, but I believe the price-earnings ratio is about 25 to 30. So that is not clear. Now the case against AI will be why our price-earnings ratio is not through the ceiling because earnings are high. But why our earnings are high? Because some companies like Meta are investing a lot in AI, and, actually, that investment is not sustainable because their own investors have said you're doing too much. So if that collapses, then if the earnings drop off, then the valuations are not gonna be worth, are not gonna be justified to the level that they are at the moment. So I think the fact that we see experts from both angles, some claiming the AI that AI is overvalued and others say, well, it's got more room to run, suggests to me it may well be fairly priced. Or if there is overvaluation, it's relatively modest because this is something about which reasonable people have different views.

00:34:51 Andrew Keen: What happens, Alex, if your book, like your last one, becomes a bestseller and the guys at Anthropic or OpenAI feed it into their AI? Maybe they do a deal with you. So anyone who wants to make decisions about investment will learn from Alex Edmans. You in the book, you suggest we should all be contrarian. But if everyone's a contrarian, Alex, then doesn't it become an orthodoxy? In other words, does the crowd eventually determine the wisdom? Do we always need to be moving away from the crowd, or can everyone be making the right decision when it comes to investment?

00:35:33 Alex Edmans: This is what you might think and you might feel is that if I am highlighting these trading strategies which are systematically making money, won't, companies just get their AI on it and exploit that and the mispricing will go away? So interesting, there was a paper looking at what happened to the performance of a trading strategy after its publication. And what they find is that the returns do go down, but the returns only go down by about one third. So still there is money left on the table even after a study is published in the Journal of Finance and given the seal of approval of peer review. Still not everybody exploits that. Why? There could be a couple of reasons. So number one is that not everybody reads the Journal of Finance or puts their trust in these scientific studies. So even if some asset managers will be using AI and implementing these strategies, there might still be the traditional investors who are basing things on judgment and their experience, and that could still lead to some mispricings. The second reason is the fact that human psychology is so strong. We've discussed how it distorts decisions in so many other walks of life, and it may do so also for investing. So let's give an example. So one strategy which has been tried and tested since 1993 is momentum. So this is the idea that if a stock has done well over the past six months, it will continue to do well in the future, so you should buy it. And if a stock has done badly over the past six months, it will continue to do badly, and you should sell it. But this goes against one of the biggest behavioral tendencies, which is known as the disposition effect. What is the disposition effect? It is the temptation to sell our winners and to hold on to our losers. Why? If I bought a stock at 100, it's gone up to 120, I want to bank that profit because when I sell, I think I've made a great investment decision. I feel happy when I've done so. Even if it's got more room to run, I would like to take that profit. On the flip side, if I bought the stock at 100 and it goes down to 80, I don't want to take the loss because that admits to myself that I made a bad decision. I tried to convince myself it will bounce back eventually, and I hold on to it in the same way that if you go to a casino and you're down $500, you might gamble more trying to recoup your losses and to go back into the black. So what we end up doing is cutting our flowers and watering our weeds or holding on to the losers even though the momentum strategy suggests that I should stop holding on to my losers because they're gonna continue going down. So even if the evidence is there, given that there will still be some human element in many of these asset management firms, yes, you might have some which are completely driven, but many will be using human and AI hybrid. That human temptation to cut our winners and to hold on to our losers is something which is quite difficult to shape.

00:38:44 Andrew Keen: Cut you said cutting our flowers. Maybe we should be talking about cutting our tulips [unclear]. Final question. And you kind of touched on this in the last in your last comments, is about timing. In my conversation with Finn Brunton about, Polymarket, we began by talking about how Donald Trump Jr. is investing now in Polymarket. I joked that was probably a reason to get out of Polymarket. On the other hand, of course, the Trumps have a good sense of timing. Donald Trump had his own cryptocoin, memecoin, which he sold very cleverly before everybody else lost their shirts on that. Is timing in your argument in the Madness of Markets, Alex, is timing everything? Does everybody need to understand that they're always riding one craze or another? We will think of Joe Kennedy, for example, whose family, fortune was based on the fact that he sold all his stock in 1928. There are always examples of people now who sold their dot-com stock in 1999. Is the argument you make in the Madness of Markets that we should always be thinking about timing?

00:40:00 Alex Edmans: Yes. Timing is everything. So if we take the winner and loser strategy that I just mentioned, if you look at the past winners and losers over the past six months, you want to buy the winners and sell the losers because you have momentum. But if we instead looked at the past performance over the last three years, we see the opposite. We see reversal. So a stock that has done well over the last three years, it then tends to go down. And a stock that has done badly over the last three years, it tends to bounce back. So that's the foundation behind contrarian investing is if I'm to look at past performance over a long period of time, then you actually want to invest in the opposite direction. You want to be contrarian rather than trend following. But I will end with a caveat, which is it is very difficult to time the market precisely. So what I've just discussed is cross-sectional strategies. So do I want to buy recent winners or losers? So which stocks will beat other stocks? But when it comes to whether I want to buy the market as a whole, this is pretty difficult. It's hard to call the end of a bull market or the end of a bear market. And so this is why it's important to take a long term perspective. So for me, because my investment horizon may well be forty years, I also put a lot of money into the equity markets at the end of 2008, early 2009. Why? Because even though I knew it may not be a bottom, things could get even worse from there. Valuations were sufficiently depressed that in the long term, I thought that there would be a rebound. Now to try to exactly time the market and say, let's wait until it's completely at the bottom before buying in, I might end up missing the bottom and never investing. So for me, I it was more important for me to be sort of 80% right and to be buying the market just at any point in time at the end of 2008 rather than buying on the correct specific day because you're never gonna know this without hindsight.

00:42:03 Andrew Keen: Well, there you have it. The book is out in a couple of weeks. The Madness of Markets by Alex Edmans, Why Smart Investors Make Crazy Decisions and How to Exploit Them. I think what he's suggesting is our self worth should have nothing to do with our investment strategy or our success or failure on that front, which I think is very wise. His last book, which he came on the show to discuss, May Contain Lies, was a big international success, and I'm sure this one will be also. Alex, best of luck with all your investing and the book. Lovely to talk to you. Thank you so much.

00:42:41 Alex Edmans: Always nice to chat to you, Andrew. Thanks so much for having me back.