Ep. 380: Alex Edmans on Market Bubbles, Investor Biases, and the Madness of Markets

Bilal Hafeez (0:03)

Welcome to the Macro Hive Conversations Podcast. I'm Bilal Hafeez, Head of Strategy at Macro Hive. Before we dive in, a quick update. Following Macro Hive's acquisition by the BGC Group, BGC has launched a new regulated business called Macro Hive Markets. For the first time, onboarded clients can also access execution services via Macro Hive Markets. This new workflow will allow macro institutional investors to benefit from strategy and insights alongside access to global liquidity. Please contact Andrew Simon or Gail Motibrian on Bloomberg, or click the link in the description below for more details on Macro Hive Markets and its service offering.

So on to our podcast show. In this episode, we have Professor Alex Edmans from the London Business School. He's one of the world's leading academics on companies' purpose, social value and profits. So on to our conversation.

Greetings and welcome, Alex. It's fantastic to have you back on the podcast show.

Alex Edmans (0:57)

It's great to be back, Bilal. Thank you so much for the invitation.

Bilal Hafeez (1:00)

I have to say, every time I have you on, you've just written a book. So is this that you're just a glutton for punishment, or what's this motivation for writing this latest book that you've just published?

Alex Edmans (1:10)

I actually love the process of writing. So why do I do it? There's lots of great academic research out there, which has lots of relevance for a real world audience, but often it's buried. So it sits in academic journals and it's rather technical. And so why I write is similar to why I post on LinkedIn frequently, is just to share the findings of research with the general audience. And out of all the books that I've written, this is the one is the most fun. So it's about how emotions affect the stock market, what causes the market to soar one day and crush the next. But hopefully it's not just entertaining, it's also useful because nowadays many more people invest in in the past. We now have the tools to invest in anybody's pocket. You don't even need to log on to a computer. You can just thumb swipe your way to Robin Hood. This is something where the stakes are high. Hopefully this is something both engaging but also practically useful.

Bilal Hafeez (1:56)

This book, you look a lot at how investors engage with the market directly in some of the recurring errors they make. Why that topic and not something else?

I know you have a number of different fields of research that you have. Why this particular subject?

Alex Edmans (2:15)

Two things. Number one, because the evidence suggests that these errors are actually quite pronounced. You might think, okay, it might only be amateurs who make mistakes in the market, but even professionals who are paid millions to invest billions, they can suffer from overconfidence, overreaction and underreaction. So this matters for the people that we trust to manage our pension. They might make mistakes. And then what do you do as somebody investing for the future? Are you going to trust these people or go into an index fund instead? But the second reason is the market is just a laboratory for decision making in general. So the same mistakes that we make in the stock market, such as overconfidence and overreaction, we exhibit in other fields as well. But the market is such a great laboratory because you have loads of data. You can see the investment performance of an investor or a fund manager. And by having data and showing that we overreact and underreact to certain things in the market, that will also suggest that in other fields, we are also misreacting to information.

Bilal Hafeez (3:14)

Yeah. And the book I forgot to mention, it's a Madness of Markets and it's available everywhere, which we'll talk more about towards the end. But I like the way you structured the book. You basically have three broad sections. One is a set of chapters linked to overreactions. How we overreact as investors, underreaction and then misreaction. And then you have a concluding part in terms of takeaways that we have. So on the overreaction side, you go straight for it and you talk about bubbles. And there's a chapter, I think chapter one, I think it is bubble trouble, why we all go crazy at the top.

So let's start with that one. And at the moment, we're in an interesting time of markets at the moment. Many people think we're an AI bubble. But if we look at the broader sweep of history and the academic work on this, what's your reasoning behind why bubbles happen and how it's linked to overreaction?