From Cartoon Apes to Reddit Mania: Why Crowds Lose Their Minds With Money

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Tobias Carlisle (1:01)

We're live.

I'm Tobias Carlisle. This is Value After Hours. I'm joined as always by my co-host, Jake Taylor. Our special guest today is Alex Edmonds. He's a Professor of Finance and the author of a brand new book called The Madness of Markets, Why Smart Investors Make Crazy Decisions and How to Exploit Them. Welcome Alex, how are you?

Alex Edmonds (1:22)

Great, thanks. Thanks so much for having me on.

Tobias Carlisle (1:24)

Can you give us a brief overview of the book?

Alex Edmonds (1:28)

Yeah, so what I'm interested in is what drives the stock market. So what you learn in any finance class, and I did a PhD in finance, was it's driven by fundamentals. So when you look at a stock price, you forecast future dividend and you discount them in a rational and dispassionate manner. Certainly that happens to a large degree, but I wanted to highlight that it's also affected by emotions and psychology. So perhaps when we are estimating dividends, we're not just making a rational assessment about the company's future prospects. We might be caught up in some hype. So maybe now some people argue they could be AI hype. Maybe in the past there was tech hype or electric vehicle hype.

The show is that even smart people may make these mistakes systematically, and if so, that makes things interesting because for active investors like yourself, you have opportunities where the market is losing its mind.

Tobias Carlisle (2:18)

You started at Morgan Stanley. Were you in a trading position there? What were you doing at Morgan Stanley?

Alex Edmonds (2:23)

I did two things. I first started in investment banking, so that was doing mergers and acquisitions in London. That wasn't really looking at the markets, although there was still irrational behavior and a lot of emotion in banking. But when I got my first taste of markets in Morgan Stanley in New York City in the summer of 2004, I was doing fixed income sales and trading then. That was the time of the European Championship of Soccer in 2004

That was something I thought, well, it really shouldn't affect Morgan Stanley in New York. Number one, Americans don't really care about soccer. Just talked to Off Air about the importance of baseball, and there's three other American sports which are much more important than soccer.

Number two, it's the European Championship, which Team USA was not part of. But what was surprising to me is traders' emotions were rising and falling with the games. It wasn't just people got happy or unhappy. One, because his team got knocked out by Greece, he stormed out of the office, he didn't return for a few days. And this is a professional paid a lot to trade bonds, and yet his emotions were heavily affected.

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