“When people trade, even before fees and commissions, the average trade loses money.” — Alex Edmans
Isaac Newton might be able to foresee the movement of the stars, but he couldn’t foretell the madness of men. It was a lesson that cost the great physicist £4 million (in today’s money) when he threw his fortune into the South Sea Bubble. This priceless parable in Newtonian psychology opens The Madness of Markets, the new book by Alex Edmans — London Business School finance prof, old friend of the show, and author of the bestselling May Contain Lies.
Dr Edmans’s prognosis is bracingly unflattering to guys like Isaac Newton and Mark Twain who splurge their fortunes on speculative ventures. Intelligence, he reminds us, is domain-specific, but many smart people simply aren’t intelligent enough to realize this. So, in the age of Robinhood — when we can all trade anything from stocks, options, crypto to NFTs — the supposed wisdom of crowds is sometimes driven over the cliff by the irrational exuberance of dumb individuals.
Speaking of driving off the cliff, ninety percent of us think we’re above-average drivers, Edmans jokes, and this same delusion applies to markets. Unfortunately, such stupidity can be expensive for big brain types like Newton or Twain. “When people trade, even before fees and commissions, the average trade loses money,” he warns.
So close your Robinhood account and stick your cash in the bank? No, not quite. Know your edge, Edmans reminds us. And when it comes to making sense of the current AI boom, Edmans offers some particularly wise words. The AI sector trades at 25 to 30 times earnings rather than Cisco’s bubble-era 190, he notes, so it’s unlikely anyone will lose their life’s savings on Anthropic or OpenAI.
That said, the good doctor Edmans advises, don’t confuse your self-worth with your net worth. That’s a rookie conceit that only somebody as smart as Isaac Newton would fall for.
Five Takeaways
• Newton’s £4 Million. The smartest victim on record rode the South Sea Bubble and lost £4 million in today’s money. Smartness is domain-specific — and Dunning-Kruger wears a suit.
• Know Your Edge. Knowledge or endurance — like Clare College’s £10 million bet at the bottom of 2008. No edge? Index humbly. The zero-commission promise is a myth: spreads run up to 25 percent.
• Why the Ox Doesn’t Apply. The wisdom of crowds fails where money meets emotion and Reddit — in bubbles, everyone bids high together. When cocktail parties fill with AI tips, the trade is crowded.
• Is AI a Bubble? Maybe Not. Cisco 2000 traded at 190 times earnings; AI trades at 25 to 30. Fairly priced or modestly overvalued — “reasonable people have different views.” And use AI to ask why you’re wrong.
• Cutting Our Flowers, Watering Our Weeds. Published strategies keep two-thirds of their returns — psychology is that stubborn. And the closing wisdom: your self-worth should have nothing to do with your net worth.
About Keen On America
Nobody asks more awkward questions than the Anglo-American writer and filmmaker Andrew Keen.
Website: https://keenon.tv/ Substack: https://keenon.substack.com/ YouTube: https://youtube.com/@KeenOnShow
Buy The Madness of Markets: penguinrandomhouse.com
Chapters:
00:00:31 Introduction: Citizen Twain’s bad investments
00:01:53 Newton and the South Sea Bubble: £4 million lost
00:03:00 Smartness is domain-specific
00:04:50 Dunning-Kruger in a suit: Holmes, Kissinger, and the mosaic
00:06:42 Buffett’s humility: noise versus signal
00:07:09 Know your edge: Clare College’s 2048 Fund
00:09:43 Mackay versus Surowiecki: why the ox doesn’t apply
00:12:38 NFTs and survivorship bias
00:13:29 The cocktail-party indicator
00:15:24 The age of Robinhood: everything is tradable
00:16:07 The zero-commission myth: 25 percent spreads
00:18:15 A book about human nature
00:19:41 Overconfidence: 90 percent above-average drivers
00:21:38 Should marriage have a prenup?
00:23:01 Ideology and the madness of crowds
00:25:33 In (partial) defense of experts — and Fama’s dissent
00:28:33 Why crazy investors make smart decisions
00:30:12 Is AI a bubble? What the PE ratios say
00:31:11 The right way to use AI: ask why you’re wrong
00:34:51 What if Anthropic reads this book?
00:35:33 Momentum versus the disposition effect
00:40:00 Timing is everything — and almost impossible
00:42:03 Self-worth and net worth