Why do smart people make irrational investment decisions? In our 50th episode, returning guest Professor Alex Edmans explores the psychological biases that shape our decisions, from overconfidence and confirmation bias to our tendency to over react or under react to new information. Drawing on his latest book, The Madness of Markets, Alex explains how these biases affect financial markets and business decisions, and how we can make better decisions by questioning our assumptions.
Episode 50
Alex Edmans
The Madness of Markets
Know What Your Edge Actually Is
If you’re going to take a position that differs from the market, ask yourself what your investment edge actually is. It might be specialist knowledge, but it could also be patience or a longer time horizon. Alex points out that individual investors can sometimes have an advantage over professionals because they face fewer constraints. Before acting on a conviction, be clear about what you know, and what you don’t.
Treat ESG Like Any Other Business Driver
Alex argues that ESG is often treated differently from other areas of business strategy. Instead, businesses should assess sustainability issues with the same nuance they apply to innovation, productivity, or marketing. Some ESG factors can create value, while others may be financially immaterial. The question is whether an issue is strategically and financially relevant.
Make Space for Dissenting Ideas
Better decisions require an environment where different ideas can actually be expressed and challenged. Alex’s work on cognitive diversity suggests that differences in perspective can come from many places, and that diversity only becomes useful when people feel able to question the status quo. The same principle applies personally: seeking out perspectives that challenge your assumptions can help you think beyond the prevailing consensus.