Finance professor Alex Edmans joins the podcast to discuss his new book, The Madness of Markets, and a problem at the heart of investing: markets seem irrational enough for opportunities to exist, but competitive enough that most of us struggle to exploit them. How do you know when you have found genuine market madness, rather than simply failed to understand what the market understands?
Alex starts with some of his own research. Looking across more than 1,100 football matches, he and his co-authors found that when a country was eliminated from a major tournament, its stock market fell by around 0.5% the following day, even after controlling for movements in world markets. A football defeat should not change the profits or dividends of the country's companies. It gives us a rare example where sentiment can be separated, at least partly, from fundamentals.
But defining madness gets complicated quite quickly. We talk about houses with unusual histories, gold, crypto and other assets whose price can depend partly on what somebody else might pay for them later. If millions of people share a belief, and that belief lasts for decades, is it still irrational? And can a story itself become economically important?
That takes us into narratives, bubbles and behavioural finance. Markets can overreact to vivid, exciting information, but they can also react too slowly. Alex explains why the evidence can support both short-term momentum and longer-term reversal, and why apparently contradictory human biases do not necessarily cancel each other out.
We then turn to one of Alex's longstanding research interests: intangibles. His work found that companies with high employee satisfaction subsequently outperformed, and later research found the relationship continued outside his original sample. Why might an effect survive even after investors know about it? Alex suggests that investors can believe culture, employees and other intangibles matter while still finding them remarkably difficult to measure, defend to an investment committee or put into a valuation model.
There is another twist. Market prices do not just tell us something about the world. They can change the world. CEOs look at their share prices. Boards react. Acquisitions can be cancelled, investment plans changed and managers replaced. Alex discusses his research on governance through exit, where investors can influence a company not by persuading management, but by selling and allowing the share price to send a signal.
We also ask whether professional investors really are less biased than everyone else. Expertise can help, but it can also create overconfidence and give us more evidence with which to justify what we already believe. We discuss Neil Woodford, cognitive diversity, why junior investors need permission to challenge senior ones, and the danger of judging a decision by its eventual outcome rather than the quality of the decision at the time.
Alex is particularly interesting when he turns the question on himself. He describes his tendency to read negative intentions into ambiguous emails, and the one-minute delay he once put on his outbox to stop himself responding too quickly. He talks about deliberately listening to arguments he disagrees with, choosing the literary agent who was most critical of his book proposal, and trying to find people who will tell him what he has missed.
He also gives a wonderfully concrete example of getting investing wrong: backing a fitness start-up founded by trainers he knew and admired. Familiarity made him feel knowledgeable, his own taste in punishing workouts was not representative of the wider market, and his relationship with the founders made him less willing to ask difficult questions. The company eventually failed.
We discuss how Alex's thinking on sustainability has become more qualified since Grow the Pie, what writing May Contain Lies taught him about the persistence of misinformation, and the different lessons he hopes readers will take from The Madness of Markets. For many people the sensible conclusion may simply be: recognise your biases and own the market through index funds. For professional investors, the challenge is harder: can you identify situations where the market is systematically getting something wrong?
We finish with overrated or underrated, including efficient markets, carbon taxes, company purpose statements, quarterly reporting, universal basic income, social media and AI. And we talk about Alex's own creative process: long stretches of uninterrupted time, working with pencil and paper, reading outside his discipline, and leaving enough space for new research questions to emerge rather than pretending everything can be put into a five-year plan.
Key takeaways
A strange price is not necessarily a wrong price. The hard part is working out whether the market is responding irrationally or pricing something you have missed.
Sentiment can move markets. Football results offer an unusually clean example of emotions affecting prices without obviously changing underlying corporate value.
Stories matter. Investors sometimes buy not for cash flows but because they expect other people to value an asset in the future. That can work, but it is a different and riskier game.
Markets can underreact and overreact. Short-term momentum and longer-term reversal can coexist.
Intangibles are difficult even when everyone agrees they matter. Culture, employees and other non-financial assets are harder to measure and translate into a valuation than conventional financial information.
Prices can affect fundamentals, not just reflect them. Share-price movements can change investment, acquisitions and management decisions.
Experts still need defences against bias. Knowledge can produce better judgement, but also greater confidence in the wrong judgement.
Actively look for the counterargument. One of Alex's recurring habits is to seek out the strongest evidence and arguments against his existing view.
Alex Edmans in his own words
“A little bit of knowledge can be a dangerous thing.”
On why knowing more about finance does not automatically make someone a better investor.
“Try to take the counterpoint to the position that you want to take.”
On a simple defence against confirmation bias.
Contents, transcript and podcast links below
Contents
00:00 Meet Alex Edmans
00:35 Spotting market madness
01:29 Football losses move markets
02:58 What counts as irrational pricing?
05:04 Resale value and trading sentiment
07:47 Stories that fuel market madness
09:42 Gold, crypto and collective belief
12:33 Momentum, reversal and contradictory biases
16:17 Why investors struggle to value intangibles
21:13 When the wisdom of crowds breaks down
24:07 How market prices change real decisions
28:14 Voice, exit and reflexivity
33:02 Expert bias and better investment processes
37:31 Alex's unusual defence against his own biases
39:55 Lessons from a failed start-up investment
43:03 Rethinking sustainability
44:38 Misinformation, evidence and disagreement
45:52 What The Madness of Markets is trying to achieve
47:48 Overrated / Underrated
56:06 Social media and AI
01:00:06 Deep work and creativity
01:03:36 Future projects and final advice
Transcript
(AI assisted, so errors possible)
Ben: Hey, everyone. I'm super excited to be speaking with Alex Edmans. Alex is professor of finance at London Business School and the bestselling author of the books Grow The Pie and May Contain Lies. His latest book is The Madness of Markets, which explores why even smart investors make irrational decisions and what we can learn from them.
Alex is a brilliant thinker on markets, business, evidence, and human behavior. Alex, welcome.
Alex: Thanks so much for having me here. It's great to be here, Ben.
Ben: Markets can seemingly be irrational enough for opportunities to exist, but they also seem to be competitive enough that a lot of people, even most people, fail to capture them.
How do you know when you have found genuine market madness rather than merely failed to understand what the market understands?
Alex: This is very difficult because when the market moves strongly, how do you know whether it's overreaction or a rational reaction? So if you take AI right now, people argue that the market is overvalued.
However, even if there's only a small chance that we have an AI boom, the, um, i- the payoff if this chance is realized is so large that it, that's actually quite rational for it to be so richly valued. Similarly, if a pharmaceutical company has even a small chance of developing a cure for sickle cell anemia, it is right for that to be richly valued.
So what I did, uh, when I started out 20 years ago in my career in research, was to try to find something that shocks investor sentiment, but didn't have an effect on fundamentals, so I could get a clean measure of emotions. And so what I looked at was the effect of football results, such as World Cup eliminations.
So, why do I look at the World Cup rather than the Premier League? Well, because if Arsenal win and Chelsea lose, then some English people are happy and some are unhappy, so it's hard to see what's gonna happen to the overall stock market. But if England loses in the World Cup, then the whole of England might get depressed, and this is gonna cause negative sentiment.
And so what my co-authors and I did, we looked over 1,100 football games, and we found that on average, when a country is eliminated, the market falls by about half a percent the next day, even after controlling for what's happening in the world market. And you might say, "Well, half a percent, is that a lot?"
When actually a Trump, uh, pronouncement will cause the market to go up by 3 or, or down by 2%. Well, actually half a percent is, uh, 13 billion pounds wiped off the FTSE 100 on a single day, and that is something where there should not be any impact on profits and dividends. So that's just one example, but there are other examples where what people can do is try to take events which don't really contain any news content and see whether the market will react to them.
And if you see the market reacting to non-news, then you suggest that that reaction could be irrational.
Ben: And what exactly do you think counts as madness? Is it simply that the price is wrong, or is there a psychological cause? So I was reading, uh, a set of papers recently, which basically I'm gonna kind of sum up and simplify, but they found that if, say, a house is valued at a million pounds, and everyone kind of agrees on that and kind of, you know, on the, in terms of pricing But then people find out that someone has recently died in that house, they then discount it by 10 to 20%.
So they say, "Well, I'm only prepared to pay £900,000 for this house." So one set of views would say, well, that seems to be a little bit irrational because the cash flows and things haven't changed, but obviously there's a kind of psychological context for that. So I'm interested in this. Do you have a view on what really counts as madness?
Alex: Yes. I think it's you're reacting to information which does not affect the fundamental value of the asset. And then the question is, well, what is the fundamental value of the asset? Well, it depends on whether this is a buy and hold asset or something that you're gonna resell to somebody else. So in the case of a house where somebody's died or a haunted house, uh, there's, there's a paper on, on that as well there, given that you can live in the house, you don't necessarily need to resell it to somebody else, it is irrational for there to be a, a discount here because it's not gonna be affecting the intrinsic value of the house, the square footage, or the number of rooms.
So if indeed there was something which does not have any effect on the company's fundamentals or the asset's fundamentals, and there was a reaction to that, then I would say this is an overreaction. Another example aside from, um, houses is recently we had Allbirds, the trainer company announced it was rebranding as Newbird AI.
The stock price went up by 582%, even though there's no clear evidence that it has any expertise to execute an AI strategy. Again, I would see this as similar to the reaction to a football defeat. It's reacting to something which doesn't really affect fundamentals and dividends, and so I would call that madness.
Ben: Uh, but sometimes this madness seems to last quite a long time. In fact just sticking with houses, 'cause I guess people understand that, I was reading somewhere that there- there was a house or an apartment where I think the current pope was born in or l- lived in for some time, and suddenly the price of that house, I think, has leapt to sort of 100 or 200% premium to nearby houses and what it was worth before that.
But also when we look at these kinds of premiums to kind of brand value or where people have lived, uh, that seems to last for many, many years. So some people would say, "Well, if it's lasting for so many years, is that really a sign of madness or has something else happened?"
Alex: Yeah, that's a good point. And again, I think it goes back to whether you are buying the asset for its intrinsic value or for its resale value.
So let's say you're to buy this house because the pope lived in it, and you think the country is very religious, and you will be able to sell this in, in a few years' time. There you might say, "Well, that is something which is justified," but you need to know what you're investing on the basis of. You're investing only based on what you can sell it for later, and there's a risk to this.
What if the country becomes more secular in the interim? What if there's a scandal in the Catholic Church? And also, you're not getting returns on that capital in the interim. You're getting the l- living in the house, but you're paying overboard for that. And similarly, this was my position with SpaceX, if I did not understand or am not begin to analyze SpaceX's fundamentals, but I saw there was quite a lot of hype there, and some, um, people thought, "Well, this is gonna be the future."
There were some institutional investors who might not get their full allocation. So I subscribed to this in the IPO, not because of the fundamentals but because of the madness, and I sold it within two hours afterwards for about 173. I bought it at 135, and now it's gone back to below the pre-IPO price.
So if you believe that you are buying it to resell it, then what you might be trying to predict is people's future sentiment. That is a legitimate reason to invest, but just to know that that's a very risky way to invest because that's even more difficult to predict than future dividends and fundamentals.
So at the same time that I try to put in, uh, money into SpaceX, I actually put in 15 times that same amount into Treasury bills, into gilts. Why? Because I have a mortgage coming up for refinancing in about a year. So if you are going to try to play the game of investing in something where the entire value or a large part of the value comes from the value others ascribe to it, just know that this is risky.
Ben: So madness can be a bona fide, uh, investing or maybe speculating or, or trading s- strategy. I think that's interesting. So how important is storytelling then, and narrative? And when does storytelling then potentially become fraud or manipulative, and, you know, how robust is that really as an investment strategy?
Alex: I think storytelling can be very powerful in order to create a narrative that can allow madness to form and madness to persist. And this is something linked to the narrative fallacy. It's the idea that we love to listen to stories, and stories are memorable. When we had ... Before we had writing, there was the oral tradition, and people passed along ideas through the form of stories.
And so if you look at, say SpaceX, well, this is something that's gonna be transforming the world. We don't need to be limited by our boundaries and what, what's, uh, here in, on Planet Earth and the planetary boundaries we see here. So that is something where there was a compelling story. There was a visionary leader who's able to do unconventional things, who's seen as such a hero that the standards of governance, uh, don't apply, and, uh, and index- indices are willing to relax their standards.
So that could be a compelling story. Similarly with non-fungible tokens or cryptocurrency, you think, "Well, this is digitizatio- de- democratization of finance." When there is a compelling story there, you might think that Bitcoin, which is something which has no intrinsic value, its value is only what other people ascribe to it.
If that story's very compelling, then it can st- then it can persist for a long time. But notice that just as some stories can form, they can crash very quickly. If Elon Musk was to suffer an accident or a fatality, if you were indeed buying a company based on a story which is based on one particular person, then that is particularly fragile.
Ben: So you should be really aware of why you are investing or making a buy or a sell. Is it because you've assessed cash flows or dividends better, or is it because you think you have some insight into the story or the narrative? I'm interested maybe in this story point as it comes up. Do you think that the durability of a story, the durability of, call it, a collective belief, is in itself fundamental?
I've heard some people call this a type of inter-subjective belief, so it is only true because a lot of people think it's true and lasts. And 'cause you mentioned crypto, um, perhaps something which people understand perhaps a little bit longer is how do you best explain gold? Is gold essentially this collective belief idea, this storytelling power, and, and therefore it will just hold for as long as the story holds?
And do you think therefore gold, uh, is something that people could consider as an investment, or is it something which should be put in the kind of the madness bucket, and is, uh, you know, a very difficult thing to assess?
Alex: I think gold and, and crypto, they both have similarities in that there is a significant part of the value which is ascribed to the fact that other people value it highly.
And so if we believe that, that worth is gonna be persisting, then it could be a reasonable asset to own because you think there's gonna be this enduring value. I would say then there's those differences between gold and crypto, in that gold does have uses, such as jewelry and so on, which you don't have for crypto.
Clearly the number of people who invest in gold i- is, is greater. The amount of gold that's used as an investment is greater than the demand for jewelry right now, so there is part of this, uh, resale aspect to it. Um, but I'd say here you have some fundamental value, but also value which is ascribed to other people.
And so the longer that this story persists, then perhaps the longer people think, well, it will persist in the future. So given that gold has been as, seen as the safe haven reserve currency for so long, if people believe in this, then they're w- going to fl- flee to it whenever there's times of uncertainty, and that's gonna be self-fulfilling, and it's gonna just keep its value be- holding, uh, in the future.
Ben: So there is some power to, to the, to the durability of collective belief. I
Alex: think that the- And this is why just beliefs in anything are, are really difficult to shake. So like the, the view that the world was flat, or the view that, um, smoking is, is fine for you, or that climate change is, is, is not man-made.
A lot of these beliefs because you have that and you have confirmation bias there, then anything which contradicts that belief, people are willing to quite dismiss. If something has been enduring for so long, then that story will persist- in particular when there are attempts to knock it down, because of confirmation bias, we'll dismiss those attempts.
Ben: Yes. And so you, and, and you touch on that in your, in your second book. But that is actually true for a lot of ... Philosophers talk about this, like laws are a set of collective beliefs in some way. Even the idea of money, you know, on, on a, on a note it says, "Promise to pay the bearer." There is a promise, there is a sense of belief within some of that.
I think it's very interesting, though, when we think of some of these biases and beliefs which come up in your book, that humans seem to extrapolate recent trends too far. But they also seem to update too slowly when new evidence appears. And in a lot of these biases, humans can apparently have biases in opposite directions, sometimes potentially at the same time.
How do you know which bias will dominate? And how do we explain seemingly contradictory biases when they come up?
Alex: This is an extremely fair challenge, and this to me is one of the most convincing challenges to the idea of behavioral finance. So, what is behavioral finance to begin with? Well, it's the idea that prices are not driven by fundamentals, they are driven by emotions and sentiment and irrationality.
But the defense that you're, you're, you've just given, Ben, is, is a, it's a reasonable one, which is, well, sometimes the market overreacts and sometimes the market under-reacts. So if you're overreacting and I'm under-reacting, we're gonna cancel each other out and the price is going to be, uh, at fair value.
And it also makes it difficult for us as investors to know what to do. Um, so let's say I- AI has done very well recently. Is that an overreaction and we should short, or it's an under-reaction and we should buy more? So this is where evidence and research and data is very useful, is that we can look at what sort of things the market under-reacts to and overreacts to, and is there a systematic pattern?
So one thing that you can look at is the duration of past performance. So Dick Thaler, who won the Nobel Prize for his contributions to behavioral finance, one of his most famous papers said that, look at the last three years of past performance of a company. If you do that, you typically find there's overreaction.
So if I were to buy all the losers based on the past three year performance, sell all the winners, and hold them for another three years, then you get a reversal, last losers become winners, past winners become losers. You do the same thing, but you define your winners and losers based on the past six months of performance, so that's more short-term rather than long-term performance.
You get the opposite. You get momentum. So stocks that did well over the past six months, they continue to do well over the next, and stocks that did poorly over the past half year continue to do poorly. So in general, what we find is there's short-term momentum and long-term reversal, and that kind of makes sense intuitively because, yes, if the market is slow to react, then a company that has done well recently, it could have more room to run.
But if the stock has been on a tear for three years, then maybe that outperformance is so strong that it's gonna mean reverting. So one thing that you can look at is the duration of past performance. Another thing that you can look at is the type of information that you might under-react or overreact to.
So if there's very salient information such as a rebrand to AI, such as, um, the addition of dot-com in the dot-com bubble, that is something where there can be a hype around and the market o- gets overexcited about it because it's very visible. Something which is more intangible and non-salient, there might be an underreaction to.
So one of my papers looks at the effect of being the best company to work for in America. This is a company with a strong corporate culture. And because so many investors like to focus on tangible assets that they can clearly feed into cell C23 of a spreadsheet, they might not value corporate culture or other types of inva- intangibles as much
Ben: So everyone says culture, employees, innovation, and, and brand matter.
But you're suggesting in your research paper that actually sophisticated investors themselves still struggle to value them. And I recently saw that actually that work had been replicated out of sample, so it still seems to last. Why do you think the market really still misses these intangibles? Are we really...
Is it because it isn't so salient that we have this behavioral bias, which seems to be structural? Supposedly, if we were all so clever, and actually there's a lot of people who wanna make money from this, uh, it, it seems to me that people would have thought that maybe this is a bias which should have faded away.
But do you think there's something special about intangibles and this kind of information that human beings find a little bit tricky?
Alex: Your point, Ben, is, is, is a very good one because this is a bizarre finding. So, my paper was published in 2011, and it looked at 28 years of data showing that companies with high employee satisfaction outperformed over that 20-year, 8-year period.
Now, people should just be trading on that, and that the alpha should have disappeared, but independently, it was replicated, and the 10 years afterwards, it still continues to hold. S- so why is that the case when there was this, um, study showing that there is uh, free money on the, on the table here? I think there could be a few reasons.
So number one could be the persistence of beliefs that we have just discussed when we talked about how enduring stories are. So if the traditional view is that the value of a company depends on dividends and tangible assets, then people who are used to valuing companies based on that way, it's just more difficult to try to incorporate culture in a model.
If you have to stand up and defend your investment to the investment committee, it might be easier to say, "Well, the product demand has increased by this amount," rather than the employees feeling happy. And then not only might people ignore it or not put full weight on it, people might actively bet against this.
So there is this anti-ESG movement, which I am not unsympathetic to. I have myself expressed some skepticism out, a- about, um, sustainability claims. But there is the extreme view, which is, well, any company which treats its work as well as woke and fluffy and not focused on the bottom line, and if that is the view, then actually, then you do have people actively ignoring it, which then leaves some more money on the table.
So I'd say there's one set of reasons. So those people just don't fully recognize it, or they actively bet against it. Then this more nuanced view, which is that people do think culture is important. But they might measure it wrongly. So one aspect of corporate culture that people think is really important is diversity, and there have been studies by the likes of McKinsey claiming that if you look at just demographic diversity, then companies with more ethnic minorities or women on the board or the wider workforce, they easily outperform.
And so that might be a simple measure of culture that investors use, and not only is that potentially good for their financial returns if it's backed up in the data, but it's a good marketing tool by saying, "Well, we're supporting gender diverse or ethnic diverse companies." So people might measure it in this way.
Another hot topic right now is inequality, with the likes of Gary Stevenson and others claiming that inequality needs to be addressed. People look at measures such as the gap between CEO pay and the pay of the average worker, and they may say, well, the smaller gap there is a sign of better culture. But the problem with both of those is that it's not empirically backed up by the data.
So with the demographic diversity, there is really no link, uh, between that and future performance. There's no negative links, but there's no positive link either. Whereas with inequality, actually it goes the other way, where if anything, companies with greater gaps between the CEO and workers, they typically will outperform in the future.
We're not claiming this is causal, but at least the correlation is in a different direction to what people will say. So that's the second reason. We think culture matters, but we don't know how to measure it. And the third might be we know culture matters, and we do know how to measure it. We could look at things like the best companies to work for.
We can look at Glassdoor. We can do some textual analysis. But we still don't really know how to incorporate this into a valuation spreadsheet. Whereas if I can see my earnings outperformed by 5% over the past quarter or product demand went up by 10%, that might be something more easy to incorporate. So it is the translation of something I, I do believe to be relevant, but I don't know how I'm gonna put it into the price.
Just like if you have two jobs and there's lots of different dimensions ac- among, a- across which they will differ, it may well be that salary ends up being the bigger driver of, of your decision, even though clearly what you want from a company is more than just salary.
Ben: So summing up some of your thinking around the wisdom of crowds and biases, the reasons that these biases are not canceling out in the wisdom of crowds is because of behavioral traits and things happening in the crowds where they're all thinking one way, or they're all thinking another way, and so those biases aren't quite canceling out?
Or does it matter the type of bias that we're thinking about and other periods when actually canceling out does seem to work and the wisdom of crowds is superior?
Alex: Mm. It's good that you reference the wisdom of crowds then, because that is perhaps the other view, the counterpoint to what I'm arguing.
So there's a very famous book called, by James Surowiecki, about The Wisdom of Crowds, which is that you want the collective wisdom of many people, and that is better than the views of even some experts. So it starts off with the story of a county fair where everybody has to guess the weight of an ox, and random people who know nothing about farming, they just put in some guesses, and some will guess too low, some will guess too high.
And actually, what happened was the average guess was very, very close to the actual weight of an ox, and that was much more expert than the, um... Much more accurate than experts such as farmers. And this is played out in, in many other cases. This is why people will say, "Well, just trust betting odds," because this is the agglomeration of, of, of many, many people.
But it breaks down when there is emotional attachment and psychology. So nobody really gets emotionally attached to the weight of an ox. Some will vote to vote, um, will, will guess too high, and some will guess too low, and they'll cancel each other out. But we do get emotional about particular types of company, so there will be quite a lot of hype, say, on cryptocurrency, on artificial intelligence, on electric vehicles.
And because what is the driver of that bias, it's human psychology, and human psychology, well, that is perhaps common to all of us. That's why we might all react in the same direction and get too excited on the upside and too pessimistic on the downside. I think where things will, are more likely to cancel out is where you won't have people all in one direction because that might depend on things such as political beliefs.
So one can argue maybe the stock price of, of Tesla right now is actually fair because there are people who will not touch it because they just dislike Elon Musk as a person, and others might be huge fans o- of him. And so if you have, quote, "right-wing people" overweighting it compared to fundamentals, and left-wing people underweighting it, then overall this might counterbalance each other.
In the past, people thought, well, is there a sustainability bubble where ESG poster children were overpriced? Right now, given there was some pushback against sustainability, uh, maybe there you get less overpricing than what you might have done in the past.
Ben: I'm interested in what prices may tell us or not tell us.
And I think there's some research which argues that market prices don't merely reflect companies' discounted cash flows, and we talked about some of this. But more importantly, they can actually influence investor and manager decisions. I, I'm kind of interested then when does a market bubble or high market prices or the price of a company become more dangerous when executives or investors start believing it?
And what, if anything, should managers, CEOs, or investors learn from a share price if it has momentum or not, and when should they be thinking to just ignore it? Is there any evidence that you've looked at where you can tell whether you should be ignoring it or not ignoring it?
Alex: This is a really important and interesting stream of research.
So the traditional view is that the stock market is a mirror of economic activity, so it just reflects what's going on, it doesn't affect it. For example, if you think of a literal mirror, it will reflect, uh, how much I'm losing weight, and I can exercise and see whether I'm, I'm, I'm losing weight. But the actual mirror doesn't affect my weight loss.
It's my diet and exercise which will have those true effects. But with the stock market, actually not only might it reflect the, um, economy, it might actively affect what we're doing by changing managers' perceptions. So what do I mean by that? Let me just give a concrete example. So if you are Carly Fiorina of Hewlett Packard, you make a bid for PWC's consulting arm, and the stock price falls significantly, then the manager might learn from the price.
She might think, "Okay, we've done our internal analyses, we have consulted the top investment bankers, um, and we thought this was a good deal. But we have now seen investors vote with their feet, and analysts are trashing this idea. Maybe they know something that we don't. Maybe they're an independent outside view, and we are just suffering from groupthink here."
And indeed, in that case, what she ended up doing was abandoning the deal. And more generally, there was a large-scale study of hundreds of mergers and acquisitions which found that after a merger was announced, the more negative the market reaction, the more likely it was for the deal to be canceled. And this has been replicated not just in M&A, but also in terms of investment, where when stock prices tend to be high, then companies will invest more because they will see the stock price as being a positive signal of investment opportunities.
But then, as you say, Ben, this is why, uh, the madness of markets can actually have some really problematic consequences. So we often think that the stock market is a zero-sum game. If the price is wrong, then there's some winners and some losers, but the aggregate economy doesn't, meh, doesn't get affected.
But if indeed prices drive real decisions, then the consequences of market mispricing can be severe. So I think AMC, um, the meme stock company, when its stock price rose a lot, they thought, "Oh, let's start investing in things," and they were looking at buying a Nevada gold mine and going into lots of crazy expansion, thinking, "Oh, well, my stock price is high.
I've got great investment opportunities," not knowing it was caused entirely by sentiment. Um, similarly, there was a rush to, uh, oil dr- uh, drilling and, and exploration, again, caused by temporary, um, mispricing. So I think the thing for a manager to look at is, well, if my price has gone up too much or gone down too much, why might this be?
Are there non-fundamental reasons? And one paper that I wrote with two co-authors, Itay Goldstein and Wei Jiang, looked at one non-fundamental reason, which is mutual fund outflows. So if indeed, um, your stock price falls, but it is because your own investors needed to withdraw and cash in, so let's say you were held by Woodford and he needed to redeem, that's nothing to do with your company's prospects, and therefore I should ig- ignore any price changes and not use that as a signal
Ben: That's interesting.
That leads me to two other ideas or questions. So they're a little bit separate but interlinked. So one set of questions is around, I think there was an economist thinker, Albert Hirschman, who developed a framework of voice, exit, loyalty. And I kind of think this is really interesting as to when do you think it's more important to use voice or speak with a company, or a company finds that, or when it's actually more important to have an exit signal.
So actually investors exiting and your stock price going down is potentially a stronger signal than trying to phone up the CEO and convince them that their strategy is wrong. Y- your share price going down is the signal that the strategy is wrong and really disconnects it. And then the other adjacent question that it put in my head was there was some thought from economists that when a lot of surveys, when there's a lot of news that we're going to enter recession, businesses themselves get worried about that.
They change their behavior and lo and behold, that's one of the reasons that then we don't enter recession, which is why recession models often give you a missed signal because when it's a very strong signal, uh, we have this reflexive thing. Is that the-- do you put any weight on that? And is actually that the same sort of mechanism that we're talking about here?
Alex: Yeah. So there's two really interesting questions here, so let me decompose them. Let me start with the, the second one, is that while the market's reaction to an event could be so strong that that event ends up being canceled. So when Liz Truss announced the unfunded tax cuts, people said, "Oh, this was-- is so bad for the economy."
Um, then bond yields rose significantly, bond prices fell. But then that reaction was so marked that it led Liz Truss to, um, resign eventually, and then, and then the prices went in the other direction. Uh, similarly with Donald Trump and his tariffs, you might think if there's somebody who doesn't listen to the market and doesn't learn, it might be Trump because he is untouchable.
But even he, when the tariffs were a- announced and there was a big negative reaction, um, then, um, these were canceled or at least put on hold and the market rebounded. And so this is why there's the trade known as the taco trade, because Trump always chickens out. So what does this mean? Is that actually sometimes even if you think an event was bad or there's really bad news, maybe the best thing to do is to sit tight.
Because if you, like in chess, see one move ahead and you might see a market reaction to this or a politician reacting, then actually what might seem to be a bad event might not be so bad because it could be canceled. Now, we think of the analogy of this within the corporate level. Let's say a company announces really bad earnings.
Are we gonna sell the company? Well, actually, if those really bad earnings figures means that there's gonna be a takeover or means that the board of directors is gonna fire the CEO and, and replace him or her with somebody better, then it may be better to, to, to, um, keep hold of this. Uh, and so this is important because this suggests that the power of the market to affect decisions, not just reflect them, might mean that the more sane rather than mad strategy will be to stick with a company or an asset which is underperforming.
The first part of your question is, uh, the different ways in which we can respond to underperformance and the traditional view in economics was you do governance through voice. You intervene in a company, you launch a proxy fight and, and this was what I was reading during my PhD, um, when I was studying corporate finance.
And then there was the, um, case of Kirk Kerkorian who, who tried all he could to, uh, reform GM, and then he couldn't, and then he ended up having to sell his stake. And I thought, "Well, this is odd." Uh, w- we all have all of these models about intervention and voice when even this really powerful and well-respected investor could not change the company.
That then inspired me to write my job market paper on governance through exit. So what is a job market paper? When you graduate from a PhD and then you try to get a professor position, there is one paper that you present at Harvard or Stanford or Wharton, uh, and for me, this was a paper on governance through exit.
And I think why this is powerful is it means that even if you are not a large investor, you are not able to influence a company by telling management what to do or if management is really intransigent, you can still have an influence by selling and affecting the stock price. Why? Because it's the idea that the stock price is a signal of a company's financial performance, and by affecting that signal, you might precipitate some corrective actions
Ben: And so do you think professional investors or maybe experts, uh, as a general class have fewer biases than non-professionals?
Or do you think that they just build better processes to try and combat this bias? Or in fact, maybe, uh, they don't really do that at all and we just, you know, fall by our human nature and, and this is something which is part of the human condition
Alex: I think it's certainly possible if, if you're not cognizant about your biases and you don't actively design processes, for experts to actually be even more biased than the person on the street.
So you might think, oh, well, is it always the case that, um, people who are teachers and doctors should hold index funds and accountants and, um, finance people should trade individual stocks? I wouldn't say this is the case. Why? Number one is the Dunning-Kruger effect, is that a little bit of knowledge can be a dangerous thing.
I might think, "Well, I'm a finance professor, let me trade stocks." But even though I understand finance, I just do not have the day-to-day information that you will, because you're talking to CEOs and companies and you're analyzing drug pipelines in a way that I would never be able to get the same types of information.
And another issue is that if you're an expert, you will have more data to inform you. And you might think, "Well, how can that be a bad thing? If data is informing me, then I should become even more of an expert." Well, sadly, that's not the case because we might respond to data in a biased way. So let's take a football manager.
If you win a game, you say it's because of my amazing tactics. If you lose a match, you say it's because the referee or it was unfair, I was unlucky. And so this is something known as the self-attribution bias, is we chalk up successes to our own skill and we attribute failures to outside consequences. And there is some psychological evidence that men are worse at doing that than women.
And so if this is the case, then somebody who is an expert, you may be a professional fund manager, you might get too overconfident and, and think that it is, um, due to your skill when it could actually be due to luck. And this is particularly the case in investing, where there's a lot of things which are outside your control.
A, a bad decision could end up being good in retrospect, uh, just because you get lucky. This is something that Annie Duke, the former World Series of Poker champion, calls resulting. We judge a decision by its result, not by the process. If I was to play blackjack and twist on a, um, 19 and get a two and hit 21, they say, "Well, that's a great decision."
But it was a poor decision. I just got lucky with the outcome. And so people might say, well, this is the, um, this was the case with Neil Woodford. He did, he did very well. Um, but was this just some lucky stock picks? And then many people, I have to admit, including me, put money into his fund when he went independent and started up his Woodford Funds, when what led to his strong performance was actually luck, uh, rather than skill So that's what you do if you are untrammeled, and therefore what are the ways in which you try to address those behavioral biases is to be aware of them and to try to make sure you have as much cognitive diversity as possible so that you challenge people's assumptions.
And last year I released a report on cognitive diversity in asset management in, in the House of Lords. It was commissioned by the Diversity Project. And I won't repeat all of the prescriptions, um, from this. You kindly, uh, fed into, uh, this report with some really good ideas of how to design processes, but one of them is to try to address the problem of the cult of the star fund manager.
If you're somebody like Woodford, who has had some successes, while those successes might be due to luck it doesn't mean that you should be unchallenged. Often in asset management firms, and you'll know this much better than me, it may well be that an analyst thinks that he or she can't challenge the fund manager.
Anything that we can do to make it easier for juniors to challenge seniors, that this is seen to be an expectation of a junior rather than you being belligerent, that is something where you're gonna get more viewpoints on the very complex problem of how to invest
Ben: So what bias do you think you are most susceptible towards, if any?
And have you tried to build a particular process or defense for it?
Alex: Yes. That's a great question to ask me. I, I, I first start with my most, uh, my biggest bias just i- in, in life, maybe not just investing, is I might attribute negative motives to people when it could be something innocent. So if I, I, if I, if I get an email where it could be interpreted negatively, I, I might interpret it negatively and, and then start to reply in a negative way.
So before ChatGPT, what I did is I put a timer on my outbox. So, whenever I, um, reply to an email, it sits in my outbox for, for one minute. Uh, and so sometimes I will then fish it out and think, "Well, can I reply in a more charitable way?" Because maybe I could give that person the benefit of, of, of the doubt.
A- a- and many times it frustrates me because I, I have to... I- if it's, even if it's a legitimate email that I'm sending back, I need to wait for one minute before closing my laptop. But it's something that, that is a price I know I have to pay because I have this bias which causes me to, um, perhaps, uh, i- interpret emails in, in, in a more negative way.
Now, with ChatGPT, what I'll do is I will ask it, "Well, how... Do you think this email was rude?" And they might say, "Ah, I can see why you could interpret it as rude, but they were just being a bit careless and, and sloppy with their, with their wording." So I try to use technology to help me. Then in investing uh, confirmation bias I suffer from, uh, just like many other people.
I do like to interpret information in accordance with my prior beliefs. And so again, I will have to try to actively take steps to address this. So during Brexit, I was a strong Brexit supporter, and then I would go to... So I was a strong Remain supporter, and therefore I would go to talks by Brexiters so that I could see the other side.
When I chose the agent for my, uh, last book, he was the one who was most negative out of my proposal. He thought it had the most room for improvement, whereas there were others who were saying, "I'm ready to send it out right now." And so I'm always trying to get critical people to give me a, a, a different viewpoint to tell me what am I missing out on.
Ben: Yes. Get critical views. That's great. Well, I guess that leads me into thinking, what has been your worst investment mistake or decision? Or you can do the other, what has been, you think, your best investment, uh, decision or process? 'Cause as we pointed out, maybe it's the process rather than the outcome, which sometimes is the most important thing.
Alex: So I've made bad investment decisions where I've invested in, uh, startup companies where I know the founder. And I know the founder, and it's also in an industry, uh, that I think I might have knowledge on. Let's say, uh, uh, the fitness industry, for example. So I know the people. So there was a startup company called Grindhouse, which was founded by five ex-Barry's Bootcamp trainers.
Uh, I w- as you know, I'm a huge fan of Barry's Bootcamp. I thought these trainers were fantastic trainers. If you go to the class, you can see how much better they are than any average or even a t- t- top-end trainer. And I thought, "Well, this is, this is gonna be great that they're going and breaking out among themselves.
I've been to their classes. I know how good they are." Well, one issue here is familiarity bias, is that okay, I do know them as trainers, but does that mean I have knowledge about how they are in terms of operations and budgeting and, and finance and business decisions? Often we all invest with our friends and family, thinking, "Oh, I'm a great judge of character."
And character matters because culture matters, and I, I'm someone who believes that culture matters. But even though people claim culture eats strategy for breakfast, the strategy's important. You need to get the strategy and the finances right. And here I had this familiarity bias which led to me not being discerning about those other things.
Second, I, um, looked at this when I was a consumer- as a consumer, I think I suffered from the Dunning-Kruger effect. I thought, "I know these people. I've, I've been a consumer of their product," but I viewed this only through my lens. So I love really difficult workout classes where you get, um, blasted and, a- and treated like maybe an army drill sergeant.
I am not the majority person in the population who wants to go to such a, a, a fitness class and for what I thought would be really great, W- was a really top quality class, and to me, a cut above the rest, would not be to the average person. It might be seen as, as, as too difficult or, or, or too aggressive.
And then number three, I think it was more difficult for me to challenge them. So I was one of the, the, the leading investors in this. There's a famous pop star who i- invested the most because she knew one of the founders. I think there was a big French capital firm, and I was number three behind them.
But because of my relationship with them, I would not ask them the discerning questions that I might have done, uh, otherwise for fear of uh, jeopardizing that friendship. In the end, the company, um, went, went bust, sadly. And so that was one where I do think I was affected by emotion and my own biases.
Ben: Yes, there are a lot of biases there. A- and it goes two ways. I heard someone who looked at the Apple iPad and thought, "Well, I'm never gonna use that." Mm. A- and therefore assumed that nobody else was ever gonna use that, and obviously got their forecast very wrong. So you've now written several books. Do you think after all the books that you've written that you've particularly changed your view, either on any of your own research or claims, or maybe you've had a biggest change of view on something in general?
Alex: Yes, thanks. So my first book, Grow the Pie, was about the business case for sustainability, how sustainability is not just nice for people on the planet, but it contributes towards long-term business success. And that book, I, I try to make a balanced book by highlighting the need for companies to be profitable in addition to being socially contributing.
But even though I think that book was balanced, my views on sustainability have become more and more nuanced o- over time. So I'm more and more recognizing the limits to sustainability, how difficult it is to put in practice, the existence of diminishing returns and trade-offs. So since then I've written a bunch of papers.
One of them was called The End of ESG. That's not an anti-ESG paper, but it highlights how ESG needs to be treated with the same rigor as any other business decision, rather than being put on a pedestal and, and being seen as untouchable. And another paper called Rational Sustainability, which argues that the same rationality and discipline should be attached to sustainability as other issues in business.
So I'd say my views on sustainability have become more nuanced and more moderated. I still do believe it has the potential to create a lot of value, but I believe it's been misapplied in many, uh, situations. So I am a, a, a bit more discerning about that than I was, um, when I first wrote the book and I thought people will view this, um, nuanced and they will be rational, open-minded.
Actually, the implementation of this was less rational than I hoped. In terms of May Contain Lies, my book on misinformation, I thought, oh, when people hear about how bad these biases are and how much misinformation is, is out there people will, uh, be more discerning, and sadly, I'm wrong on that point as well.
Um, right now we see Gary Stevenson, who puts out a lot of views on inequality, where he gets basic data wrong, so he will just, um, confuse income and assets, which are two completely different things. Now, you and I could see exactly the same data, and you could say taxes should be higher, and I could say taxes should be lower, and we could respectfully di- disagree on that and have an interesting debate.
But when you don't even agree on the facts to begin with, uh, it's then much harder to have a discussion because those facts are being misrepresented. And this then means that people's views on this area are driven by misinformation. So it's not that I disagree with your, your, your viewpoint, you, because I put more weight on economic growth than inequality.
That's a valuable thing. But if the facts are not there to begin with because you think, well, you can put all of these taxes on and the billionaires are not gonna leave, then you're not gonna see a trade-off which is actually, um, will be there in, in, in the data Uh, with the madness of markets, we'll, we'll, we'll, we'll see.
Um, what, what... So a- actually, it's good that you asked me this question right now. What do I hope to get out of this book? And why I'm excited about its potential, whether it's borne out or not, we'll see, is that it can be applied on lots of different levels. So let's say the most basic level is you're somebody, you read the book and you think, "Oh, I should not...
I should be wary of my biases. I should not be hyp- um, giving into hype. I'm just gonna hold index funds." And if what I do is I deter somebody from YOLOing into crypto or buying into a single AI stock, then I think I will have achieved my objective. Actually, let's not be biased and let's try to hold the market portfolio.
But then there's a more full fat version of the book, which is I am gonna be an active stock picker. Well, why? Because it could be you're a professional investor out there, and what I'm saying is, well, if you are going to, um, make it trade on individual stocks, well, here are certain things to look out for.
These are things which are undervalued, such as corporate culture. Here are things that are overvalued, and that is something where a more active investor can trade, I think, in a more informed manner by looking at, well, what is the more information relevant, uh, decisions. So I think if it changes investing behavior, and why it's difficult to see its success is on the one hand it will make, make some people less active And then other people that might then make them more active because it might make them realize there's additional things they could be exploiting.
And I need to make sure that the right audience, uh, responds in the sa- in the correct way because if the uninformed person becomes more active and the informed person becomes let- less active, that's in the wrong direction. What I want is, is the in- uninformed person to still play the stock market, but through investing in index funds, and then the informed investor to know that here are the additional sources of alpha that I can capitalize on.
Ben: Great. Well, let's see if that hopefully plays out. May- I thought we'd perhaps do a very quick round of overrated, underrated. So I will give you one quick topic, and you could say, "Oh, I think this is overrated or underrated." Or, or you could say it's correctly rated, it's neutral, uh, with maybe a thought and, and then we'll pass on.
So overrated or underrated, the efficient market hypothesis.
Alex: I think it's overrated. I believe that markets are not efficient. Uh, I believe behavioral finance is something that should be taken seriously.
Ben: Carbon taxes, do you think they're underrated or overrated ideas?
Alex: I think they're underrated. So I believe that carbon taxes are a very good solution to the climate crisis.
This is something which is supported by basic economics and externalities, but it's, I think, political reluctance rather than economic problems which has caused them to, uh, be slow in adopting, being adopted.
Ben: Yeah. Pro-economy, not political economy, I guess, on that one. Company purpose statements. Company purpose, underrated or overrated?
Alex: I'd say they're overrated, and you might think, well, that's surprising because my first book had the subtitle How Great Companies Deliver Purpose and Profit. But I think a purpose statement do- uh, that's something which is often used for marketing. A, a statement if it doesn't actually affect how you go about decisions, then it is really not worth its paper.
I know that sometimes I'm asked to, before my courses, say, well, what the learning objectives are. I don't really explicitly think about learning objectives. I can give a good course without thinking about objectives. Before giving an after-dinner speech or a TED Talk, you don't have learning objectives for the audience.
You just focus on, on the content and the delivery. So I think that's more performative rather than focusing on the substance of what a company should be doing.
Ben: Yeah. Sometimes it's too surface. Quarterly reporting, overrated or underrated?
Alex: Ah, this is a very good one. I would say overrated, but not by much.
So, and I think my views here are a bit more moderate than they were in Grow The Pie. So in Grow The Pie, I thought grow- uh, quarterly reporting was, was very overrated. Why? Because I said, well, the value of a company is far more than their short term earnings. There's so many other aspects of a company, and if you just focus on quarterly earnings reporting, then the market is going to be ignoring all of those other factors.
What has now changed since I wrote the book is you do have a lot of now sustainability reporting, and some might say it's too much. You have these outside parties who are asking companies to give this information. It's not clear what they'll do with this information, it's gonna go into a black hole somewhere.
It costs a lot of money to actually disclose that information. So therefore, there could be a role of quarterly reporting in order to make sure that in addition to all of the sustainability reporting, a company does still report its financial performance. If you did not have quarterly reporting, there is an argument that there could just be speculation over what financial performance is, and if there's more uncertainty, then that could be bad for capital markets.
So I'd still say overrated, but I would not say as much as I would have done six years ago.
Ben: Yeah, that seems fair. I think also, at least in big capital markets, the report is one thing, but actually h- having questions and answers with management on a regular basis is quite important for good functioning capital markets.
Obviously, they also do conferences in the rounds. But there is some evidence that actually if, if management teams don't explain what they're doing for long periods of time, uh, that actually that might be a little bit less efficient as well.
Alex: And also that if, if companies are putting more into sustainability reporting and if investors understand that, they will respond in a less knee-jerk reaction to quarterly reporting because they know, well, the value of a company is going to come from elsewhere.
So there's one thing in accounting where they call the earnings response coefficient, which is how much the stock price changes to unexpected earnings, and this varies a lot with other things that a company might be doing. Not surprisingly, for companies with more intangibles than the earnings response coefficient is lower.
Ben: Yes. And I read some research as well that if something unexpectedly bad happens for a company, particularly if it wasn't maybe in management's control, or maybe even if it was, uh, the recovery, if they subsequently perform better, can be quicker, where you actually essentially have a, a score of management credibility or transparency in, in that type of reporting because investors are just more likely to believe that the management teams are recovering from something bad happening if they've been very good and transparent with their communications.
Alex: And that makes a lot of sense. And I, I'd say this is not a behavioral bias. That is actually rational. Because people are human, they make mistakes. If you've got a track record of being really honest, then y- y- you could have just, just made a mistake. Whereas if this is something which is more systematic, then it is more rational for you as an investor to think, "Well, this could be deliberate rather than accidental."
Ben: Sure. Okay. Overrated and underrated. Universal basic income, UBI. Do you think it's a good or poor concept?
Alex: I think it's overrated. Um, so I, I do understand the importance of, Social cohesion and equality, and I also understand that, uh, there will be mis- misfortunes, and we do need to have a social safety net because people through no fault of their own, um, they could be out of work or they could be physically una- unable to work.
But maybe I'm being distorted by specific proposals or implementations of universal basic income rather than the concept, but my reaction to the proposals is, if this is something which then just, it significantly decreases your incentive to work, then I think this is highly problematic. And so within the UK you have 1 million people who are young people who are not in education, employment or training.
If you are giving a stronger safety net, then this ... If this provides lower incentives to, to get a job or, or to get educated, then this is a massive loss in, in, in, in human potential. People say, "Well, what is the definition of hell?" It is you get to, um, you die, and then you meet the person who you could have become, and I think one of the things I'm really passionate about, and this is why I'm in education, is to allow people to fulfill their potential.
And I think things which disincentivize people be this maybe potential universal basic income or the Gary Stevenson message that it's not your fault, it's the system's rigged against you, and there's no point you, you trying because, because the game is rigged. I think this is hugely problematic.
Ben: Yeah, and I think even advocates will admit that there's only been small scale trials, and implementation is quite tricky. But the, uh, latest round of trials has not been quite as positive as they had hoped. And part of it is that we seem to underplay the intangible associated with having a job. So obviously there's money and all of these other things, but there are these things...
And again, it might depend on the culture and society, so we're not e- exactly sure, but there's confidence and self-belief, and these other aspects to having a job which seem to be a little bit more important to humans in society over and above the sort of income stream that maybe you could replace with a UBI or that a job gives you.
But obviously still heavily debated.
Alex: Absolutely. So it gets you up in the morning, it gives you a purpose. It allows you to... It gives you interactions with, with others. It... You, you interact with teams, and you have to resolve disputes. So there's all, all, all of these positive things which come a- above the income.
That's a really good point, which I, I, I didn't emphasize enough.
Ben: Okay. Overrated or underrated. Oh, this is maybe an either or. Macroecon versus microecon.
Alex: Oh, okay. So when I applied for my PhD, I wanted to do macrofinance because I just thought this was so fascinating. So when I would read The Economist, I would always read finance economics rather than business.
So business would understand a company, and I thought, well, it's macro, which is really interesting because if you just shape the context in which companies do business, that is much more important and influential than shaping one particular company. In the end, all my research has become on, on micro factors such as corporate culture and corporate governance.
Um, so I'm afraid I'm gonna give the fence-sitting economics answer, which is both. Both. We need to understand both the big picture and, and the detail.
Ben: That seems fair. Okay, last two of these. Uh, social media, overrated or underrated?
Alex: So I would say underrated from the vantage point of me and the people I typically interact with. So I remember when f- social media first came out, I thought, "I'm never gonna be active on, on Twitter. This is just for attention-seeking people." That was just my own prejudice, not actually understanding what social media was about.
Now I'm very active, particularly on LinkedIn. I think this is a fantastic way of getting your ideas across to a wide audience. So there are many people who might read some of my posts who've never met me in person, and also a way for me to learn. So sometimes I might write something and then somebody gives a counterpoint which I hadn't thought of, or they tell me about another paper which is related to, um, the point that I've made.
So I think it is a way of disseminating ideas and having impact and influence, but also for you learning and having your ideas being tested. It's a bit like the stock price. You learn from the stock price. If I put a, I put a social media post up and then there's a lot of negative comments, then, uh, maybe I learn that my view was an uninformed view out there.
Sadly, in my profession, we put very little impact weight on a professor's social media impact, when I think, well, this is the way that we actually get our ideas across. And it's not just my own ideas. I often will post papers by other people. So certainly for my profession, I think it's hugely underrated.
There will be people for whom it's overrated because they will use this as their primary source of information without checking. So for others it could be overrated because they're putting too much weight on it. But from my vantage point in my circle, I think my profession significantly underweights it.
Ben: That's fair. And also from where I sit I see a lot of people who have, I guess you'd call them sort of special interest groups, and it's definitely really important for them. It might not even be a special interest, right? It's just an interest group, and you can find those who have similar interests to you, which you might not be in your very small circle, but obviously when you go off to the internet, you have a larger circle.
So final one on the overrated, underrated AI. I guess this is specifically, uh, large language models and, and agents and the like, but do you think AI is overrated or underrated?
Alex: Oh, again, another tricky one to end with. I think, um, from my vantage point, I think it is, uh, actually underrated. Often people might be Luddites and not understand the power of technology and, and maybe the quote thinking class might like to underrate it by saying, "Oh, we are so smart people, we don't need AI.
We can't be enhanced by AI." I find it e- e- extremely useful. So I won't use AI to write for me. I can see a lot of social media posts which are blatantly AI written in, in an embarrassing way, which is because it's so obvious. But instead I will use this as a really good research assistant. So it might be, let's say updating my lecture notes.
I say, "Well, can you find another example of this merger which had great strategic rationale but had a culture clash? Can you update this?" And so I will use this as a really good research assistant. And this substantially increases my leverage compared to what it would've been otherwise. Um, sometimes I can get this to challenge me.
For example, is there a different interpretation of this email? If before I send this email , are there certain things that you would correct in this going forward? And I've only started to scratch the surface of, of what, what, what it, what it can do. I know that people are using this as financial advisors and, uh, g- uh, asking this to give some, some decisions which could be affecting their family's future wealth.
So I think if we are to use it, but also recognize its limitations, rather than just doing something because AI says so, I think it could be a really powerful tool. Of course, if you are knee-jerking, reacting to it without, um, being discerning, then it could be overrated.
Ben: Great. Okay, that's all the tricky questions over.
Then we'll just come to the final couple of questions. I'd be interested, is there anything you wanted to, uh, share about your own personal creative processes in terms of is there a particular way that you write? Do you like to write in the morning or the evening? Do you do these kinds of 45-minute chunks and you do research?
Is there anything about how you actually create, and also you create lectures as well as books and, and material, that you wanna share on your, on your process? Uh, and maybe that can apply to any current or future projects that you're also working on, but, uh, be interested in, in those projects and if you've got anything you'd like to share on your creative processes
Alex: Thanks very much for asking.
So I'd say two things in terms of creative processes. So one thing is to have really uninterrupted chunks of time, so where I can really think and get deeply into something. So, uh, for my last two books, um, I wrote significant chunks of this in the local library. And the local library is not the most pleasant place in terms of conditions, but why I w- work there is because I'm surrounded by other studious people.
And so this allowed me to really focus. I'm in an environment where everybody else is working, so I'm not just be- gonna be goofing off and, and checking email. Now that I live in a house rather than a flat, I just go to the top floor of my house where I don't have my computer there. I just have pencil and paper.
Or if it's summer, I'll just sit in my garden, again, without the distraction of any devices. Uh, my administrative assistant knows that if, if there's, if... To schedule a meeting, if people request a meeting, to put this on days in which I have other meetings and try to make this adjacent to another meeting so there is not the fragmentary time in between.
So for me, large uninterrupted periods of time are very valuable. Then in terms of, well, what to do with that time and, and where ideas come from, I really believe in the idea of reading widely and tr- cross-fertilizing ideas from different disciplines. So I was very lucky to go to a Montessori primary school where it was academically strong, but you could not get an academic scholarship.
You could only get a scholarship in music, uh, drama, sports, or art. They wanted people to be really, uh, well-rounded people. When I was at secondary school I did English, German, economics, and maths, which was a combination of arts and, and sciences. And this is why some of my research is quite interdisciplinary.
For example, the effect of s- football on the stock market, that's psychology and finance. Employee satisfaction, that's something which is more human relations with management and, and, and organizational behavior. I have stuff which is at the intersection of accounting, uh, and, and, and finance. And the three books that I've written, they're on very different themes.
One is sustainability, one is misinformation, one is, um, behavioral finance. There were people who've been really successful writing, like, let's say Cal Newport, lots of books on productivity. And you could say, well, there is actually an argument for specialization and saying similar things many times.
That's economies of scale. Uh, but for me it's, it's just more interesting for me to work in different areas. That's where I get a lot of passion from. Yes, my views on sustainability have changed since Grow the Pie. I could write another sustainability book. But for me it was more interesting to branch out into this, uh, other areas.
And notice it's not branching out into something just because I think it's new. I've been working on this topic of behavioral finance for about 20 years now. And now is where I think I've accumulated enough knowledge to share it with the general public.
Ben: Great. And current and future projects that you're working on?
Alex: Yeah, so, so right now, just in the very short term, it is on, on, on the book and the, the marketing and the dissemination of ideas, which I have to admit I, I don't like as much. I love writing, and I will be really really stringent on writing the same chapter 100 times just so that the language is perfect, when I know, having written two prior books, that what is much more important for success is the marketing aspect of it.
I just, as an aesthete, I just want the text to be perfect, and so I'm sort of forcing myself to have to do the, the, the more publicity part of it. But the publicity of this book is really fun because with the last two books, there was one central idea. W- when I did a podcast, I would always speak about pretty much the same things.
With May Contain Lies, it was breastfeeding and IQ, is that correlation or causation? Here, the chapters of the different books are very different from each other. So we could have a podcast where we only talked about chapters one and five on underaction and overaction, and another podcast could be chapters six and seven.
So because, a bit like Freakonomics, they're all manifestations of craziness in the market, but in very different areas, this is something that I don't think I'd ever get tired o- of speaking about. So it is a real privilege to have, um, this opportunity, when initially I thought, "Oh, this is something more I have to do.
It's an obligation." It's more, for me now, an absolute pleasure. Then in terms of other projects going forward, I have some ongoing research projects, some of which you might be aware of. Say, uh, the link between equity inclusion and financial returns, or the sustainability survey of fund managers with Tom Gosling and Dirk Jenter, where they are in the publication process and I want to get them finally published.
And then in other more long-term things, I'm not sure actually. Because often we view research as setting out your five-year research plan and then going out and doing it, and this is indeed how research is funded. I'm now on the board or council of the Economic and Social Research Council, where we give grants where you set out your idea, and then you're offered the grant, and they go and do it.
But this is just not how research works. You just react to things. There could be new data sets that come out, or maybe CO- COVID happens, and I want to look at the effect of COVID or the effect of working from home. Right now, if there is a lot of discussion about inequality, which I think is being misinformed, that's something where I believe I could perhaps put out some correct data and, and facts there.
So while I might have some long-term plans, and I do have some nascent research ideas, I also do want to be pragmatic and responsive. And if there is an issue out there about which I think clearer economic thinking is needed, I will speak out about it
Ben: Yes. Unfortunately, the world does not rhyme with five-year funding cycles
So that's something that perhaps we've mismatched. And yes, your book is really, uh, wide-ranging, so we could have this podcast probably three times in three different hours and talk about a whole range of, of different subjects. So final question, so this would be, do you have any thoughts or advice, uh, you'd want to give to listeners?
Perhaps this is, uh, advice that you give to your, uh, students at business school, or maybe this is thoughts that you've had to the typical investor who's maybe more the person in the street. But any sort of final thoughts or advice that you'd like to share with listeners.
Alex: Yeah. Particularly for an investing standpoint is to try to take the counterpoint to the position that you want to take.
Um, so just like for me within, say, remain Brexit, I wanted to listen to what Brexiters have to say. With my book proposal, I wanted to find out what people would criticize. Similarly, if I decide I'm gonna be investing in GlaxoSmithKline, you could even ask ChatGPT, "What are the reasons not to invest in GlaxoSmithKline right now?"
And then research them. So try to look at the other side to an argument. And I think this matters in investing, but it also matters for so many other things. I think why we have so much division and, and binary thinking and polarization is that on important issues such as inequality or climate change or immigration, uh, some people might only see one side.
Ben: Great. And with that, I'll remind everyone The Madness of Markets, uh, which should be available from all good bookshops or the internet. And with that, uh, Alex, thank you very much.
Alex: Been a great pleasure, Ben. Thanks so much for having me on.