Oct 5, 2026 · 50 min
Why smart investors keep making irrational bets
How to Outsmart Your Investing Instincts
The episode shows how emotion, salience and overconfidence distort decisions, while patience and broader valuation methods can reveal overlooked opportunities.
- 1Investors often extrapolate recent events, herd around salient stories and mistake luck for repeatable skill.
- 2Behavioral anomalies matter only when they survive trading costs, institutional pressure and the difficulty of acting against consensus.
- 3Long-term investors may find value in patient ownership, corporate governance and intangible assets that conventional models overlook.
Don't miss
Edmans compares current AI valuations with the dot-com era, warning that apparently reasonable multiples may rest on unsustainable earnings or spending.
The brief
Alex Edmans frames investing as a behavioral problem as much as a financial one: emotion, herding, extrapolation and overconfidence can make sophisticated decisions irrational.
Football results, weather and pandemic winners such as Zoom and Peloton illustrate the difficulty of separating genuine market psychology from coincidence—and of resisting salient recent evidence.
The practical edge is not every behavioral anomaly: trading costs and institutional pressures can erase small effects, while genuinely long horizons may let investors capture slow-moving mispricing.
Edmans argues that governance, culture and employee investment can carry value conventional models miss, making intangible-intensive firms a possible home for overlooked opportunities.
The conversation closes on AI valuations, where reasonable-looking multiples may depend on unsustainable earnings or spending, and on the need to treat every asset as one portfolio.
What was said on this episode
31 statements · 11 positive · 17 negative · 2 mixed · 1 neutral
Sophisticated investors’ decisions are affected by emotions despite quantitative analysis.
“even really sophisticated people, yes, they did use equations and quantitative factors, but they are human. They are affected by emotions.”
Listen at 4:30
Stock markets systematically fall after national football defeats.
“we found that the market systematically fell the next day after a defeat.”
Listen at 5:20
Heart attacks increased after England’s 1998 World Cup elimination.
“heart attacks went up when England were knocked out of the 1998 World Cup.”
Listen at 6:34
Suicides rise after the Montreal Canadiens are eliminated.
“suicides rise when people, when the Montreal Canadiens get eliminated from the ice hockey.”
Listen at 6:41
Murders increase locally after an NFL team’s playoff elimination.
“murders go up in the local city after the NFL team is eliminated from the playoffs.”
Listen at 6:51
Football wins do not raise markets, while losses depress them.
“it's only a negative effect.”
Listen at 7:01
Herding can transmit psychologically driven investment decisions rather than fundamental analysis.
“sometimes we are learning from other people who are also being based on psychology and emotions rather than fundamentals.”
Listen at 10:43
People over-extrapolate from small trends.
“We over extrapolate from small trends.”
Listen at 11:56
Zoom’s stock rose 700% during the pandemic.
“Zoom went up by 700%.”
Listen at 12:51
Google Meet and Microsoft Teams were expected to catch up with Zoom.
“it should have been clear at the time, even without hindsight, that rivals like Google Meet and Microsoft Teams would catch up.”
Listen at 12:56
Investors overestimate skill’s effect and underestimate luck’s effect.
“we overestimate the effect of skill and we underestimate the effect of luck.”
Listen at 20:20
Investors lacking above-average skill should hold index funds.
“unless you genuinely think that you are above average, then maybe you should be holding an index fund.”
Listen at 22:40
Edmans invests less in individual stocks after his research.
“I myself, one of the sobering things that I've done after doing this research for the past 20 years is investing far fewer in single stocks.”
Listen at 23:15
Active management can exploit market inefficiencies.
“I do believe in active management and market inefficiencies.”
Listen at 23:33
Professional fund managers may exploit inefficiencies unavailable to ordinary investors.
“I believe those inefficiencies aren't so large that somebody like me can take advantage of them, but they are large that professional fund managers might be able to do so.”
Listen at 23:36
Slow-moving market misvaluation creates opportunities for long-horizon investors.
“this is actually a great opportunity.”
Listen at 24:54
Edmans invested a large portfolio share in equities in early 2009.
“I put significantly large chunk of my portfolio into equities at the start of 2009.”
Listen at 25:48
The Boots Pension Fund missed recovery gains by selling equities at the bottom.
“they sold out right at the bottom and not participating in the future increase.”
Listen at 26:54
Avoiding shareholder scrutiny signals poor governance and may warrant selling.
“that is something which is a sign of poor governance and may well be a sell signal.”
Listen at 33:57
Investors should sell when CEOs cherry-pick only positive analysts.
“Sell, if indeed the CEO is cherry picking the most positive analysts.”
Listen at 34:43
Top workplaces outperformed peers by 2.3%–3.8% annually over 28 years.
“companies which were in the 100 best companies to work for in America delivered shareholder returns that beat their peers by 2.3% to 3.8% per year.”
Listen at 35:39
Fund managers may rationally prioritize client retention over maximum returns.
“fund managers might not be trying to maximize return.”
Listen at 38:13
Momentum implies short-term winners continue rising and losers continue falling.
“short term winners keep winning, short term losers continue to sink.”
Listen at 39:20
Edmans substantially reduced his technology exposure six to nine months earlier.
“I actually reduced my tech exposure quite a lot six to nine months ago”
Listen at 42:02
Investors should evaluate their entire portfolio, including housing and human capital.
“Our whole portfolio should be seen as one, including our human capital and including our house.”
Listen at 42:24
High stock prices make it easier for companies to raise equity.
“when prices are high... Number one, it's really easy to raise equity.”
Listen at 43:44
Investors should welcome forces that correct overvaluation.
“we should welcome them.”
Listen at 44:26
Retail investors should reduce rather than increase AI-related exposure now.
“retail investors should really be careful now. Now is the time to pull back, not put in.”
Listen at 44:30
AI stocks’ true P/E ratios may exceed their apparent ratios.
“the true price earnings ratio is much higher than one might think.”
Listen at 45:35
Edmans reduced his technology allocation because it seemed somewhat overvalued.
“I myself have chosen to reduce my weighting in tech more generally.”
Listen at 45:47
Value investing remains viable when intangible assets are included in company valuation.
“value is not dead if you actually correctly define the value of a company of not just its balance sheet, but also those intangibles.”
Listen at 46:44
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.
Books & mentions
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