Transcript of When to Speak Up and When to Stay Quiet & Why Smart Investors Do Crazy Things

Today on Something You Should Know, when you see a spider in your house, ever wonder how he got in there? Then, you know those times when you can't decide, should I speak up and say something or just mind my own business?

This is a dilemma we ask ourselves pretty much every day. My coworker keeps mispronouncing my colleague's name. Should I tell them? I see someone crying, but I don't know them. Should I go up and ask what's wrong?

Also, the weird The weird thing about the pumpkin in pumpkin pie, and some very bad and very good decisions investors make with their money.

One of the most powerful things about investing is the power of compounding. If you get 10% per year for 10 years, that is not 10 times 10, 100%. It is 150%. So just being in the market in the long term is really valuable.

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The world's top experts. And practical advice you can News in your life today. Something You Should Know with Mike Carruthers. It can happen any time of the year, but particularly in the fall, you might notice spiders showing up in your house. Why is that? That's the topic we're going to begin this episode with today. I'm Mike Carruthers. Welcome to Something You Should Know. So, every fall especially, it seems like spiders start showing up inside your home. And so you might naturally assume that they're just escaping the chilly weather. Usually that's not the case. According to the experts at the Burke Museum, most spiders inside your house are adapted to living indoors and may spend their entire lives in or around buildings. And when you suddenly notice more larger spiders wandering around in, say, late summer or early fall, Many are mature males roaming around looking for female spiders. In fact, the museum estimates that fewer than 5% of the spiders you see indoors have ever been outdoors at all. So that spider strolling across the living room floor probably didn't just sneak into your house. There's a decent chance he's been a roommate of yours for a long time.

You just hadn't met him yet. And that is something you should know. How many times have you wondered, should I say something or just keep my mouth shut? Should you ask someone what's wrong? Tell them they've got something green stuck in their teeth? Or warn a friend that you have serious doubts about that person they're dating? Or is it just better to mind your own business? We face these little decisions all the time, and it turns out there's some fascinating research on when speaking up is helpful, when it isn't, and why we're often surprisingly bad at knowing the difference. Here to explain what the science says is Vanessa Bonds. She's a social psychologist and professor of organizational behavior at Cornell University, and she's author of a book called Should I Say Something? The Science of What to Share and What to Keep to Yourself. I think you'll find what she has discovered extremely useful the next time you're wondering whether or not to say something. Hi, Vanessa. Welcome to Something You Should Know.

Thanks so much for having me. I'm excited to be here.

So I cannot think of a topic that applies to more people more often than this one of, should I say something? Should I speak up or just mind my own business?

Exactly. This is a dilemma we ask ourselves pretty much every day, right? You can imagine, my coworker keeps mispronouncing my colleague's name. Should I tell them? I see someone crying, but I don't know them. Should I go up and ask what's wrong? I got a big promotion. Should I tell my friend who's been struggling at their job? Or I've been going through these personal struggles at home. Should I tell my boss? So, These really are just really ubiquitous dilemmas. And you would think almost because we encounter these kinds of questions so frequently that they would feel kind of familiar to us, that we would have figured out how to handle them at this point. But what's so interesting is that they do seem incredibly fraught every time, and the stakes feel really high. And that's because these sorts of dilemmas Threaten our sense of belonging, which is a fundamental human need. Some have even argued it's our most fundamental human need. So we care about other people; we want to get to know them; we want them to get to know us. And that desire pushes us in this direction of wanting to go and say something, you know, wanting to open up or ask a personal question.

But on the flip side, we worry might say something we shouldn't have and put our foot in our mouths and end up accidentally pushing people away, which is. exact opposite of what we want. So a big question for me as a social psychologist is how accurately we're able to predict what's likely to happen if we choose to speak up or not in these kinds of situations. And as it turns out, there's actually lots of research on this.

And my guess is we're probably not very good at it.

Yes, your guess is correct. And the, the interesting thing is how many different ways we're not good at it. And so One way is something called the MUM effect, and MUM stands for minimizing unpleasant messages. So this is this tendency we have to not want to embarrass other people or make them feel bad or cause them pain. You know, if we tell someone something that we know is gonna make them embarrassed in the moment, it causes us physical pain, like it embarrasses us in return. And so we use that awkwardness and that information As a reason to assume that actually maybe they don't, they don't want to hear this, this information or this message. But in fact, in many cases, people want to hear something, even if it's going to embarrass them a little bit in the moment. So let me give you an example. Imagine that you had something in your teeth, or, you know, a piece of chocolate on the side of your mouth. You would want someone to tell you. But when researchers have looked at this, and they've actually done this by sending research assistants out into the field with stuff on their faces, like lipstick smeared on their face or chocolate smeared on their face, they have these research assistants go up to unwitting participants and ask them to complete a survey and talk to them in a way where this person is clearly looking right at the smudge on their face.

And they wanted to see, you know, how many people actually say something to these research assistants. And what they found was that hardly anyone told them they had something on their face. They had over 150 people participate in this study, and only 4 people ever said, oh, hey, I think you have something on your face. But when they asked people, would you want this information? Overwhelmingly, people say, yeah, of course I want someone to tell me that. So that's one way in which we underestimate how much people actually want to hear what we have to say.

I'm thinking about times when I've struggled with this and thought it just doesn't quite rise to the level of being worth it, that it's just, what could, what's the benefit of doing this? And maybe there isn't any, and it's just easier to not. It's just easier to not is kind of my refrain, I guess.

Yes, absolutely. And this doesn't mean that every time you have feedback for someone, you should give it and just give unsolicited feedback all the time. And one of the things that you noted is what's important is, is this actually useful or beneficial to the other person? So we could take an example. Let's imagine someone interviews for a position at your job. You're in this group interview, so you see how they do. And there are some critiques you have. You think they didn't give the best interview. You have some feedback that would help them interview in the future. And we can imagine 2 sort of situations. One, despite the subpar interview, this person gets the job and they come in and now they're your colleague and they work with you. There's really no point in that situation of telling them, you know what, I really wasn't impressed with your interview, right? That's not going to go anywhere. That's going to make them feel bad with no instrumental gain. But you can imagine another situation where they don't get the job, and you have this information that might help them get the next job if they're continuing to interview other places.

And that's a situation where actually it does make sense to maybe call them up and ask, you know, would you like some feedback on your interviewing? Because I was there and, you know, I can give you some feedback if you'd like. And that can actually be really beneficial. And that's the kind of situation where people really do want to hear what you have to say.

Well, as you said, though, that there are times when it doesn't really help the other person. But what about the— what about you? Like, if there's somebody that's like always mispronouncing your name, you know, telling them isn't going to do anything for them. But it's going to do something for you because don't you hate hearing your name mispronounced?

The way I like to think about these kinds of decisions is, When we're deciding whether to say something, we're essentially trying to predict 3 things. We're trying to predict what saying something is going to do for the other person, how it's going to impact the other person. And that's mostly what we've been talking about so far. We also are trying to predict what saying something is going to do to the other person's impression of you, like how they think about you. And so there are a lot of other places where, you know, we worry about opening up and sharing personal struggles or even successes because we worry we'll come across negatively or as bragging. And we could talk more about that. And then the third thing is, what will saying something achieve? What is my actual goal in this situation? And in this case, you could imagine 2 sort of competing goals and say, I really want this person to get my name right. Right? I just want them to know what the actual pronunciation of my name is. Um, or you could say, I really just don't wanna rock the boat. And if you're sort of prioritizing getting your name right, right, it's worth saying something.

But then there's this other twist where we're worried about rocking the boat. We're worried it might offend the other person by saying something or hurt the relationship. But that's another miscalculation we often make where people don't get as upset as we think they will. When we give them this kind of feedback, even if in the moment they might feel a little embarrassed that they've been pronouncing your name wrong. It turns out that people tend to overestimate how badly these interactions or these conversations will go. And so sometimes, you know, you're calculating like, here, what is my goal here? What do I want to accomplish by saying something? But sometimes even that has this sort of misprediction built into it.

It also— another barometer that I use is if I were them, would I want somebody to say something to me? Like if I'm walking around and my fly's down, yeah, I would like someone to mention that, or there's toilet paper stuck on my shoe. You know, people are like, it's none of my business. I'm not going to say anything. Well, I would like someone to say it if it were happening to me.

Exactly. And that is actually a great question to ask yourself if you're debating whether or not to say something. Would I want someone to tell me if I was in this situation? And that's actually something that the researchers who did the lipstick study, where they sent these REAs out with smudges on their faces, they tested this as an intervention. So they had people respond to these hypothetical scenarios about things that either they were doing wrong, speaking too fast in presentations, and You know, like you said, like having like toilet paper on your shoe. And they asked them, how much would you want someone to tell you? And then they asked another group of people, how much do you think someone else would want to know this if you had this information? And they found that in general, people underestimate how much the other person wants to know this information. But when they told them to imagine it was you now, even if you were the one having this information who could tell the other person, if you took a minute to imagine yourself in the other person's situation, and you said, what if it was me?

Then they were accurate in their judgments. And so asking yourself, you know, what I want someone to tell me if I was in this situation is a great way to figure out whether you should say something.

I want to get your advice on when people ask you your opinion about something, and you know, your opinion, your true opinion may not be exactly what they want to hear. Like, you know, do these pants make my butt look big? So what do you say? And we'll talk about that when we come back in just a moment.

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We're talking about those times in life, in everyday life, when you have to struggle with, should I speak up or just keep my mouth shut? My guest is Vanessa Bonds. She is a social psychologist and author of the book Should I Say Something? The Science of What to Share and What to Keep to Yourself. So Vanessa, when people ask your opinion, and you know that your true opinion may offend or upset them, or it's just not what they want to hear, how do you handle that? Do you give your true opinion? After all, they asked. But, you know, when someone says, do these pants make my butt look big? And you think, that's the least of it. I mean, what do you say?

Yeah, that's a great question. And I think there as well, you know, it comes down to a few different considerations. What is this person going to do with this information? So let's imagine the question is about, like, you know, your friend just got Botox and you think it looks terrible. If you tell them your Botox looks terrible, there's very little they could do about that in this moment. They can't, like, un-Botox themselves. But if they're, you know, trying something on and they have another option and they could easily change, and you genuinely feel like something else might look better, there are ways to give that feedback and say, actually, I think, you know, for this event, something more along the lines of this would look even better, where you're giving that feedback, right? And it's actually feedback they can use and take. And if at the end of the day, they're like, you know what, this makes me feel good, I'm happy with this, then there's no reason to keep pushing. But if you feel like I actually have a pretty good piece of feedback about something that would look better, and And if we take this kind of— this is called benevolent honesty.

It's like, the reason I'm telling you this isn't to make you feel bad. It's to help you do better in the future, like not embarrass yourself, show up with your best foot forward, right? I'm really imagining you looking great, succeeding in the future. And when you take that kind of approach and that's how you're seeing someone, that comes across and it makes the feedback easier to give and to receive.

What about situations where, I mean, I just imagine you walk into a lunchroom and there's everybody's talking and then there's one person off by themselves crying their eyes out. And you think, well, gosh, should I go see what's wrong? Should I? And I think most people think, eh, it's none of my business. I probably shouldn't. And I don't know, what do you do?

This is such a great question. And this is actually very similar to a story that my father-in-law told me years ago, where he was on an elevator, and there was only one other person in the elevator with him. And it was this, like, young 20s kid who was dressed in a suit, holding a briefcase. And it's just the two of them in this elevator. And the young man, he drops his briefcase and just starts crying. And my father-in-law didn't know what to do. You know, he felt this empathy for this person, again, that kind of push-pull, but he didn't know if it was his responsibility. And then when the elevator got to his floor, he just walked out. And he still, you know, he told me this years and years later. So it was just something he had thought about quite a bit and talked to a lot of people about, just trying to wrestle with like the kind of guilt. He really felt like the right thing to do in that situation was to say something. And I would say this is really a case where there's 2 things that happen when you decide to say something or not say something.

You're communicating 2 pieces of information, essentially. So on the one hand, you're communicating the actual content of what you say. So whatever it is you say, you know, I hope you're okay. Um, you know, what's going on? There's like the actual content in that message. But then on top of the content of the message is the fact that you decided to say something or not. And that communicates its own piece of information. It says, I noticed you, if you decide to say something, and you as another human are important enough to me that I wanted to reach out and say something and see if you were okay. If you imagine the flip side, you don't say something, that kind of suggests the opposite, right? I didn't notice you. Even if, you know, you did notice them, to them, they don't know that. And so it's like, oh, people aren't noticing me and my pain. And if you did notice them, you decided not to say anything because they, they weren't important. And again, that might not be what you're feeling, but that's what saying nothing is communicating to that other person. And so I think for most of us, the kind of concern about what we might be communicating, once we kind of understand that that's the implicit thing it says to not say anything, it feels more important to actually reach out and ask someone if they're okay than it does this worry that, you know, they might get a little bit annoyed or feel like we're kind of butting in.

Because the idea that we're telling someone implicitly, you don't matter, I don't care enough to reach out, is for most of us, I think, Much worse to convey than like, I'm a busybody.

Yeah, well, I guess, and if I were your father-in-law, I would struggle with the same thing because you think, well, what could I possibly say? You know, this per— maybe someone just died or maybe they got fired or, you know, what is it that I'm going to do that's going to make this any better? And, but that's, as you just said, that's not the point. That's really not the point. It's really to just connect as another human being and say, I notice you and you're upset and I want to make sure you're okay. That speaks volumes. It doesn't do anything for the whatever that it is that's upsetting the person, but it is something.

That's exactly right. And I think we worry so much about getting the words exactly right that we don't, you know, we hold back because we think, you know, what if I say the wrong thing? We can't formulate the way to ask or exactly how to broach the topic in the moment, especially when it's, you know, and you're in an elevator where you're about to get off, but it's so much less about the actual words you're saying than the fact that you decided to speak up at all. And you just acknowledged, I see your pain, I'm not ignoring it, I hope you're okay. And so even if we don't get the words perfect, it still conveys something really meaningful to other people.

Yeah.

Well, and think about all the times that people have said something to you. You never sat there and went, oh gosh, they used the wrong words. They said it wrong. No, it isn't about the words. It's about the turning the attention towards and showing some concern. That's what hits home.

That's exactly right. And, you know, it's the same for saying something positive. giving a compliment. So I have some research looking at our impressions of how someone will react to a compliment. So, you know, you see someone and you like their shirt, for example, and we tend to assume that people will be annoyed at us if we go up and give them a compliment. We assume that, you know, we're going to phrase it awkwardly and it's going to seem again like we're kind of a busybody. But not surprisingly, if you're on the receiving end of a compliment, no one says, oh, like, why did they phrase it that way? It just feels good, right? It's just like, oh, this person likes something about me. And it's interesting that we tend to focus so much on the competence side. So like, how competently can I express this compliment or this nice thing? How can I get the words right? Because we think that's so important, but it's really more about just the warmth we're conveying, the fact that we took the time to say something nice at all. And that's really what the other person is more focused on.

You know, this is a topic I've never heard anyone discuss before. And I'm wondering what else about this, since you've studied it, do you think people should know about?

I think there's one thing that we often forget is at our disposal. And that is trusting other people to tell us what they want to hear. And so, When in doubt, one thing I like to tell people is when in doubt, if you're not sure whether you should give someone feedback, if you're not sure you should tell someone about something, you can ask them, you know, would you like feedback on that? Would you feel comfortable with me telling you about something that, that happened at home? Um, and we can trust other people to sort of manage their own emotions. That gives them the autonomy to say, you know what? I'm actually not looking for feedback on this right now because I don't have time to implement it, or I feel pretty good about what I've done so far, or, you know, I'm just, I'm not in the headspace to be able to talk about that right now. And people actually are pretty good at answering that question. And so I just like to remind people, when in doubt, you can ask the other person and let them decide for you.

Well, this has been very enlightening and helpful because I mean, how often do you struggle with this? Should I say something? Should I just mind my own business? And this is great advice and guidance on that. I've been speaking with Vanessa Bonds. She's a social psychologist, a professor at Cornell, and she's author of the book, Should I Say Something? The Science of What to Share and What to Keep to Yourself. And there's a link to that book in the show notes. Great, Vanessa. Thanks for sharing this.

Thank you.

Thanks, Mike. It's been so great chatting with you.

You would think that when it comes to investing, the smartest people would make the smartest decisions. But history says otherwise. Isaac Newton lost a fortune in one of history's most famous financial bubbles. More recently, people spent millions on cartoon ape NFTs. And entire markets can apparently be influenced by things that have absolutely nothing to do with money, including the weather and whether a country's soccer team wins or loses. So why do otherwise rational people lose their minds when money is involved? And more importantly, can understanding that help you make better decisions with your own money? Alex Edmonds is a professor of finance at London Business School and a leading expert on behavioral finance. He's the author of a book called The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them. And he says markets are driven by human psychology more than we may realize, which creates both dangerous traps and some interesting opportunities. Hey, Alex, welcome to Something You Should Know.

Thanks very much for having me on, Mike. It's great to be here.

So explain a little more about what you mean by the madness of markets.

Certainly. So many people believe that markets are efficient. What that means is that markets fully incorporate relevant information, and they do not incorporate things that are noise or irrelevant. But I believe that markets are inefficient, because markets do respond to things that they should not do. As an example, back in April, Allbirds, which is the sneaker company, announced a rebranding. They now called themselves New Bird AI as a sign that they were going to move into artificial intelligence. However, there was no evidence that they would be able to pull off this shift. Sneakers have nothing to do with AI. Yet the market got overly excited. The stock price jumped by 582%, even though this was only a cosmetic name change. And this is not a one-off. So in the tech bubble, companies that added .com or .net to their name, they experienced a jump of 73% on average, even if there was no actual strategic shift. So all of these are examples of overreaction, where the market overresponds to good news. They make much more of it than they should, given it was only a cosmetic name change, not backed up by actual strategic shift.

But that's in the short term. Doesn't the market correct itself? Don't those stock prices eventually settle? Don't those companies, big boom, eventually fall down and things right themselves?

They do in the long run. But as John Maynard Keynes said, in the long run, we are all dead. So the long run can be a long time. So what that means is that there are opportunities for contrarian investors to lean against the wind and to sell if a stock has jumped too much. And that period over which you can exploit it could well be months. In some cases, it could be years. So Dick Thaler, who won the Nobel Prize a few years ago for his contributions to behavioral finance, came up with a strategy where you take all companies in the US stock market, The ones that did badly over the last 3 years, you call them the losers. The ones that did well over the last 3 years, you call them the winners. If you buy the losers and sell the winners, and then hold them for another 3 years, you get reversal. Past losers then become winners, and past winners then become losers. So there is a correction, but that correction does take a long time. And actually, ironically, this is why inefficiencies might be so persistent, because the listener might think, well, if it indeed is so easy to take advantage of market mispricings, why doesn't everybody do it?

Well, it's because many professional money managers, they have very short time horizons. For example, in the internet bubble, if you thought that tech was overvalued, would you sell out? Well, the answer is not necessarily because there is a chance that the bubble could keep inflating before it eventually bursts. So Julian Robertson, a very famous fund manager who ran the Tiger Global Funds, he indeed sold out of tech, knowing that it was overvalued, yet tech kept rising. And so investors saw him losing money because he was out of tech. They liquidated, they got out of the fund, and his fund had to close in March 2000. And then eventually, yes, the tech bubble burst, but he was not around to enjoy the victory. So while you're indeed right, Mike, that these prices do actually mean revert and they correct, this can take a long time. And so these mispricings persist. This means that professional investors with other people's money to manage might not find them easily exploitable, but it may well be that amateur investors like you and I, we might be able to do this because we have a longer runway.

What's something that you think investors, you know, everyday investors like me, need to understand better about the way the markets work?

One of the most powerful things about investing is the power of compounding. If you get 10% per year, 10% per year for 10 years, that is not 10 times 10, 100%. It is 150%. So just being in the market in the long term is really valuable. Now, often people think, well, if I am to be a successful investor, I should respond to information. You snooze, you lose. We want to be somebody who's responding to information and to news. But in fact, if we are indeed people who have a tendency to overreact, maybe the best thing should just be to buy and hold the market and allow one of the most powerful forces in economics, which is compounding, to take hold.

And so if that's true, it seems like if you put your money in things like index funds, the index kind of takes care of all that and you shouldn't have to worry very much.

Correct. And this might seem an unpalatable strategy for many people because it might seem boring. You might think, well, don't just sit there, do something, try to take an active bet to see what the next Nvidia is. Because if you pick it, then that might actually get you the returns much, much faster. But actually, there's a lot of evidence suggesting it is really difficult to pick individual stocks. So some evidence took a lot of 78,000 brokerage accounts and looked at how do individual investors perform when they trade. Now, this study was pretty clever, because if what they found was that after you sold a stock, the stock went up, that is not necessarily a bad decision, because maybe you sold that stock, and you sent your kids to college, or you put a down payment for a house. So what the author looked at was what happened if you sold a stock and bought something else. So the only reason you would do that is if you think the stock you bought is better than the one you sold. And in fact, what he found was across those 78,000 was that the stocks you bought actually underperformed the ones you sold by 3% per year, even before fees and transactions costs.

So you'd have been better off doing nothing. So to invest in index funds, for many people, is something which will harness the power of number one, diversification, and number two, compounding. It's a way of getting rich slowly, but still getting rich.

The scorecard on people picking individual stocks, including experienced money managers, is that they tend to not beat the market, that in an index fund, would deliver better results than trying to pick individual stocks. And I remember that was true a long time ago. I assume it's still true today. And yet, there have been people along the way who are really pretty good at it. Peter Lynch was terrific at picking individual stocks. He was a legend in picking individual stocks. But there aren't a lot of people that are legends in picking individual stocks.

Yes, there are some people who are exceptional. And Peter Lynch, what was his edge? Well, he did what I call boots-on-the-ground investing. So he had the time to thoroughly research every company. So I believe he said one of his favorite sources of investment ideas was the Burlington Mall, where he would go shopping and he would see how customers and workers are being treated. So he'd go beyond just the financials. and look at the underlying fundamentals of a company. But for an individual investor, it is not clear where our competitive edge might lie. So you might say, well, I'm a physician as my day job, therefore I should invest in this pharmaceuticals company because I understand it's making beta blockers. And I know as a physician that beta blockers are good to combat hypertension. high blood pressure. And I know that high blood pressure is something which will be increasing over time given lifestyles. However, you have no idea about the marketing expenditure required to make this drug a success, or the production costs, or the headwinds or tailwinds in terms of prescription drug regulation. So a little bit of knowledge is a dangerous thing. You might think you have a particular bit of expertise.

But in order to understand a company requires this deep fundamental ability to analyze it, which you just might not have. This is linked to another big behavioral bias, which is overconfidence. So if you were to ask the average person on the street, are you above average in terms of your driving ability? 90% of people will say they are, even though statistically only 50% can be. If you ask people about their ability to get along with others, again, 90% will say that they're above average. And so this is why, even though if everybody was to be objective, they would realize maybe they're not experts in stock picking, because we tend to be overconfident, we think we have a greater ability to be a Peter Lynch than we actually do.

Well, and the flaw in that, it seems to me, is using your doctor example about beta blockers. Beta blockers may be a great business to be in, but it doesn't mean the business you're investing in is run particularly well. really has a very good strategy, that the people know what they're doing. You have no idea about this company. You just know the industry looks like it's headed in the right direction.

Exactly.

So in order to understand an investment, it's a bit like a mosaic theory. You need to look at all the different pieces of the puzzle, when actually it might be that you're only looking at one particular side to it, which is, I know that this drug is good, but we don't know, is this already priced in? We don't know the culture, we don't know what competitors are doing. And this is why even though the advice to entrust our manager to index funds or to active managers might seem passive, in many cases, actually being passive is a good thing. We're just entrusting it to expertise in the same way that we would ask our doctor for health advice rather than ourselves wanting to necessarily do internet research on the best way to address our heart condition.

One of the things I'd love to get your thoughts on is when the market reacts to current events that have nothing to do necessarily or specifically with financial markets, it's just some catastrophic event in the world, a plane crash or something, and the market drops like a rock. What's driving that? Is it strictly just people panicking and saying, let's get out?

This is really interesting. So take a catastrophic event like a plane crash. If the market goes down afterwards, it could be for 2 reasons. Number one, you could say it's due to emotions, that people just get upset about this. There's negative sentiment because of this tragic event, and therefore it falls for irrational emotional reasons. But there's a second explanation, which is maybe this is rational. Maybe people realize there's going to be less air travel and less economic activity. So, if the market drops, it could be something which is objective. So, this is why I wanted to look at this in my own research, is to take something which affects national mood and national sentiment, but which does not have an economic effect like a plane crash. So, what I looked at was international soccer results. So if England lose in the World Cup, this has no effect on dividends or profits or GDP, except for maybe a couple of sectors like replica merchandise. However, the whole of England will get upset. And what I found was that when a country is knocked out of the World Cup, the national market falls systematically the next day by about half a percent.

And you might think, well, is half a percent a lot? But that is about $17 billion wiped off the UK market on a single day. And so what this suggests is that sentiment is strong enough to feed through into the stock market. And this is surprising because many people won't deny the fact that our moods are affected by our emotions. However, you might think that if you're a professional, you can shake it off. You can put your game face on. Yes, my team has lost, but I'm going to focus on valuing my stocks in a dispassionate manner. But there is other evidence that even seemingly objective people are human. They are affected by emotion. So when the Louisiana State American football team lose, judges in Louisiana actually give harsher sentences, particularly if they were alums of Louisiana State University. And this is just because people are human. Even if you are in a serious high-stakes job like a judge or like a money manager, we are affected by our emotions. And these are things which will feed through to decisions, including trading ones.

I just can't understand how that works in the sense that, how do you sit around and go, gee, my soccer team lost, I think I'm going to sell all my stocks? I don't get that.

Yeah, so it'll never be something which is rational or that there's a logic behind it. It's not that I think, well, because my team has lost, I'm going to take out my frustration on my portfolio, because that is something that any professional would be able to hopefully stop themselves from doing. But if it just leads to general pessimism, more generally, then this will lead to you perhaps being less optimistic about the prospects of a stock, In a similar way to if you are a judge, if you happen to be in a negative mood, maybe you give harsher punishments. Maybe if you're a professor grading something, if you're in a bad mood, then you have a less optimistic view of a student's essay. And similarly, what are you doing? You are making an assessment, not of somebody's guilt or of somebody's punishment or of a student's essay, but you're making an assessment of that company's prospects. And just like I think it's reasonable to believe that a professor's assessment of an essay might be more negative if he or she is in a foul mood, similarly, a company— an investor might be more dismissive about a CEO's strategy or culture.

So in all of this research, does advice emerge as when these maddening things happen in the markets, this is what you should do? Or not do?

Yes, so there are some broad patterns which evidence suggests work on average. However, they will not work in every particular situation. So, so what do the average results suggest? So one of them was the idea of overreaction that I mentioned earlier. If you sort stocks on the basis of their past 3-year performance, you tend to want to buy the losers. And then you want to tend to sell the winners. Why? Because there ends up being reversal over the next 3 years. However, interestingly, if we were to do something similar, but over a different timescale, you would get the opposite result. What do I mean by this? Let's say we instead sort winners and losers on the basis of the past 6-month performance, not the past 3 years. Then actually, most recent winners stay winners. In the short term, you have momentum. And the recent losers stay losers. And why might this be? What is a winning stock? That might be a stock which has announced good news, maybe a good new strategy or some positive earnings. But maybe the market hasn't fully reacted. Maybe they released these earnings on a busy news day. when Meta and Alphabet were also releasing their earnings.

And so, the market didn't pay attention. And so, given that in the short term, we might have underreaction, then in the short term, we do want to buy losers— we want to buy winners rather than losers, because that short-term momentum will persist for the next 6 months.

So, there are a lot of professional money managers. And from what I understand, and you would know best, but That they typically don't outperform the market. And that I don't understand then how come they get to keep their job and make so much money when the market does better than they do?

Yeah. So this is a very important point and you're correct. When you subtract fees, the average actively fund manager does not beat the market. So how can they keep their job? I think a couple of things could be going on here. Firstly, it may be that their own clients don't realize that they are underperforming. And you might think, well, this is bizarre. But why might this be? Is they might not correctly benchmark. So if a fund manager has returned you 20% this year, you might think, well, this is great, when actually the index has gone up by 25%. But we might not make that comparison. So if you gamble, you go to a casino, you are happy if you come out on top. The benchmark is zero there. So as long as you're making money, you think that this was a success. And if we apply that same mindset to evaluating fund managers, we apply a benchmark of zero. Or if we apply a benchmark of the interest rate on cash, thinking that was our outside option, we might not realize that there is some underperformance. here. Alternatively, it may well be that over a long time horizon, you are not outperforming.

But if you've just had a good recent year or 6 months, maybe your clients are focusing too much on that. And they think that this is a sign of skill, not looking at the long-term track record.

Well, you know, I always enjoy talking to you because you make finance not dry. It's very interesting the way you explain your insights into it. And I appreciate that. I've been talking with Alex Edmonds. He is a professor of finance at London Business School and a leading expert on behavioral finance. His book is called The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them. There's a link to his book in the show notes. Alex, thanks again for being here.

Appreciate it.

Here's something to contemplate the next time you're enjoying a piece of Pumpkin pie or pumpkin whatever, the pumpkin inside probably did not come from a big orange pumpkin like you would carve at Halloween. Those familiar pumpkins that we use as jack-o'-lanterns, they tend to be stringier and more watery and not especially flavorful. Much of the canned pumpkin sold in America comes from varieties such as the Dickinson pumpkin. Which has tan skin, not orange, and it looks more like a big butternut squash. It's bred for the thick, smooth, flavorful flesh that makes good pumpkin puree. So that beautiful orange jack-o'-lantern on your porch and the pumpkin in your pumpkin pie may technically be relatives, but one is much better suited to having a candle stuck inside. And that is something you should know. One really spectacular way that you could support this podcast is to write a nice big 5-star review of this podcast on whatever platform you're listening on. Spotify, Apple Podcasts, Castbox, wherever. Leave a review. We read them. We appreciate them. And they really do help. I'm Mike Carruthers. Thanks for listening today to Something You Should Know.