Oct 7, 2026 · 1h 1m
Behavioral biases keep reshaping markets
IL54: Why Smart Investors Keep Making Crazy Decisions ft. Alex Edmans
The episode shows how emotion, incentives, and predictable mistakes can move prices—and how investors can design habits to resist them.
- 1Mood, sporting outcomes, and social events can influence markets despite rational-investor models.
- 2Individuals may find an edge through genuine expertise, patience, and behavioral discipline rather than superior information.
- 3Writing down assumptions, checking portfolios less often, and outsourcing sell decisions can counter recurring investment mistakes.
Don't miss
Edmans applies the big market delusion framework to AI, asking whether excitement has inflated the value of an entire industry.
The brief
Alex Edmans, a London Business School finance professor, challenges the idea that markets move independently of human emotion, drawing on research into mood, behavior, and prices.
Sporting results and Spotify listening data offer unconventional measures of collective mood, showing how emotional states can spill into financial markets.
The conversation turns to investor advantage: individuals may compete through patience, genuine expertise, and a distinct time horizon rather than by out-researching professionals.
Momentum, round-number trading, benchmarks, and active share reveal how underreaction, clustered orders, and career incentives shape supposedly rational decisions.
Edmans’ practical fixes include writing down assumptions, checking portfolios less often, and delegating difficult sell decisions when a thesis has failed.
The standout warning concerns market-wide delusion: enthusiasm for AI can inflate valuations across an entire industry, making opportunity and collective excitement difficult to separate.
What was said on this episode
29 statements · 17 positive · 10 negative · 1 mixed · 1 neutral
Market bubbles can produce broad downturns, as electric-vehicle stocks did in 2022–2023.
“What I want to avoid is if we are in a bubble, if we are in a big market delusion and the whole market then turns south as it did for electric vehicles in sort of 2022, 2023.”
Listen at 0:12
World Cup elimination causes the affected country’s stock market to fall the next day.
“when a country gets knocked out of the World Cup, the market falls significantly the next day.”
Listen at 4:02
World Cup elimination lowers the affected market by approximately 0.5%.
“it's about half a percent, even when you control for the broader world market movement.”
Listen at 4:09
Investors should avoid letting extraneous emotional factors influence investment decisions.
“we need to be very careful when making investing decisions not to be swayed by these extraneous factors.”
Listen at 4:44
National musical mood is significantly correlated with stock prices.
“what we showed was that was also significantly correlated with stock prices.”
Listen at 8:58
National musical mood is negatively correlated with government bond prices.
“it's also negatively correlated with government bond prices”
Listen at 9:03
Amateur investors may have greater potential to beat markets than professionals.
“maybe amateurs may have greater potential to beat the market than professionals.”
Listen at 11:31
Individuals’ investment edge may come from freedom to maintain long time horizons.
“your edge comes from a different source, which is exactly what you've identified, Kevin. Which may well be the ability to be free to be able to play a long game.”
Listen at 12:43
Alex Edmans invested heavily in equities during the early-2009 financial crisis.
“I put a lot of my money into equities.”
Listen at 13:02
Funds are unlikely to succeed without a clearly defined specialization.
“I think it's very difficult for a fund to be successful without having that specialism”
Listen at 19:52
Benchmarking is fundamentally sound for evaluating active managers.
“benchmarking, at its core, is fundamentally sound.”
Listen at 22:16
Active managers should outperform comparable passive index funds after fees.
“they need to be doing better than what an index fund would do”
Listen at 22:40
Funds with higher active share generally outperform because they use specialist knowledge.
“funds which were having conviction to deviate from the benchmark. Why? Because they're using their specialist knowledge.”
Listen at 24:11
Managers without unique ideas should not deviate merely to increase active share.
“If you have no unique ideas, don't just be active and deviate from the benchmark just to improve your active share.”
Listen at 25:21
Investors should evaluate managers using risk-adjusted alpha rather than raw outperformance.
“we want to look at your alpha which is your outperformance after taking risk into account”
Listen at 26:38
Momentum strategies typically outperform over reasonable time periods.
“over any reasonable time period, people have found that momentum typically outperforms.”
Listen at 31:22
Momentum crashes can be anticipated using market-volatility conditions.
“you can foresee these momentum crashes.”
Listen at 31:58
Momentum may be stronger among small stocks with little analyst coverage.
“the level two strategy is we play the momentum game, but particularly in small stocks and stocks with little analyst coverage.”
Listen at 36:28
Investors should place sell limits slightly below round-number prices.
“I might put the sell at, say, 99.9.”
Listen at 38:25
Recently declining assets are likely to continue declining because of momentum.
“If something has done poorly recently, if it's gone down from 80 to 75, it's likely to continue to go down in the future.”
Listen at 40:53
Recently rising assets are likely to continue rising because of momentum.
“if something has gone up recently, it's likely to rise.”
Listen at 41:02
Ignoring purchase prices can help investors overcome the disposition effect.
“one solution would be to say, oh, just ignore the purchase price, ignore the disposition effect.”
Listen at 41:26
Checking portfolios less frequently encourages investment based on long-term factors.
“If we are to not check our portfolio too often, which is actually advice that Warren Buffett gave, we're more likely to be investing on long-term factors”
Listen at 45:06
Investors should subject investment decisions to serious due diligence.
“we should treat any investment decision with the same seriousness as you would do any decision like buying a house or buying a car.”
Listen at 46:28
Writing down an investment thesis improves the care of decision-making.
“writing it down is really useful to make sure that you've done that process really carefully.”
Listen at 47:30
Diversification is an important investment principle.
“I believe in the power of diversification.”
Listen at 53:11
The electric-vehicle market was priced as though every company would succeed.
“the market was pricing the industry as if every single company would be a winner”
Listen at 56:28
AI will be important, but not every AI hyperscaler will succeed.
“even though, yes, AI will absolutely be the future, not every AI hyperscaler will win.”
Listen at 56:57
Some AI hyperscalers may overinvest or invest in the wrong technologies.
“some of them ended up over-investing or investing in the wrong stuff.”
Listen at 57:04
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
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