Why Smart People Make Bad Decisions is a question that sits at the heart of Alex Edmans’s work on behavioral finance, because intelligence and sound judgment are not always as closely connected as we assume. In this episode of Passion Struck, Alex and I explore the psychological forces that shape financial markets and, more importantly, the decisions we make every day.
We talk about confirmation bias, anchoring, herd behavior, overreaction, underreaction, and our tendency to create rational explanations for choices that may have been influenced by emotion. Along the way, Alex reveals why even extraordinary intelligence cannot make us immune to human psychology, why the information everyone notices is not always the information that matters most, and how learning to “see the other side” can help us recognize our blind spots before they shape our decisions.
Why Smart People Are Still Vulnerable to Bias
We often assume that intelligence gives us an advantage when navigating uncertainty. If someone has more knowledge, more experience, and stronger analytical abilities, it seems reasonable to expect that they will make better decisions. Alex’s research presents a more complicated picture. Cognitive biases are deeply embedded in human behavior, which means that expertise can coexist with the same psychological tendencies that affect everyone else.
Alex illustrates this through the story of Isaac Newton and the South Sea Bubble. Newton initially made money from the investment, sold his position, and then returned to the market as prices continued rising. The story is striking because Newton’s intellectual achievements are almost synonymous with human genius, yet his financial decision-making was still influenced by the same forces that affect investors today. Alex’s point is not really about Newton. It is about the limits of intelligence as a defense against our own psychology.
The same pattern appears in more ordinary decisions. We can become attached to an idea, interpret new information through the beliefs we already hold, and then use our intelligence to construct increasingly sophisticated reasons for why our original judgment must have been correct. Intelligence can make reasoning more powerful, but it does not necessarily determine where that reasoning begins.
The Cognitive Biases That Shape Our Decisions
Behavioral finance gives us a way to understand why markets sometimes behave in ways that seem inconsistent with purely rational decision-making. Alex explores several of the biases that influence how investors process information, including confirmation bias, anchoring, overreaction, underreaction, herd behavior, and the sunk cost fallacy.
Confirmation bias is particularly important because it affects the way we interpret evidence. We often begin with a particular perspective and then notice or interpret information in ways that support it. Anchoring creates another problem by allowing an initial number, expectation, or reference point to exert more influence than it deserves. Overreaction and underreaction describe what happens when investors give too much or too little weight to new information.
These tendencies become even more consequential when they interact. A person who is reluctant to admit that an investment was a mistake may find reasons to continue holding it. If other investors are doing the same thing, their behavior can reinforce the original conviction. What begins as an individual psychological tendency can therefore become a broader market phenomenon.
Why We Chase What Is Visible and Miss What Is Valuable
One of the most interesting ideas in the conversation is Alex’s discussion of salience. Human attention naturally gravitates toward information that is vivid, visible, recent, and easy to quantify. In financial markets, that can mean a dramatic announcement, a rapidly rising stock price, or a highly publicized trend captures attention while less visible information remains in the background.
Alex connects this idea to the way markets evaluate companies. Some of the factors that contribute to long term value are difficult to see on a balance sheet. Employee satisfaction, corporate culture, reputation, innovation, and human capital develop gradually and often lack the immediate visibility of financial metrics.
That creates an important tension. The information that attracts the most attention is not necessarily the information that has the greatest long-term significance. Alex’s research into employee satisfaction illustrates how something that appears qualitative or difficult to measure can still contain meaningful information about a company’s future performance.
This idea extends well beyond investing. In our own lives, we can become preoccupied with what is measurable, immediate, and publicly visible while overlooking quieter forms of value that accumulate over time. The things that matter most are not always the things that make the most noise.
When Individual Bias Becomes Collective Irrationality
A common assumption about markets is that individual mistakes should eventually cancel one another out. If some investors are too optimistic and others are too pessimistic, perhaps the collective result should move toward a rational assessment of value. Alex explains why this does not always happen.
When people share similar biases, their mistakes can reinforce one another. Herd behavior provides a powerful example. Investors see other people buying an asset, interpret that behavior as evidence that something important is happening, and then participate themselves. As more people join, the rising price can become another source of perceived validation.
This helps explain why markets can experience bubbles and periods of collective enthusiasm. The problem is not simply that individuals are irrational. It is that their psychological tendencies can become synchronized.
Alex also connects this idea to organizations and the importance of having people who challenge one another’s assumptions. Diversity of thought can help counteract biases when it introduces genuinely different perspectives and experiences. A group becomes more resilient when its members are willing to question one another rather than simply reinforce the same conclusions.
In this episode, you’ll learn
- Why intelligence does not protect us from cognitive biases, and what Isaac Newton’s experience in the South Sea Bubble reveals about the psychology of decision-making.
- How confirmation bias, anchoring, overreaction, underreaction, and herd behavior influence individual and collective decisions.
- Why highly visible information can attract disproportionate attention while quieter signals such as employee satisfaction and corporate culture remain overlooked.
- How shared biases can transform individual mistakes into collective irrationality within financial markets.
- Why AI may improve the quantitative side of decision-making while human biases continue influencing qualitative judgments.
- How deliberately seeking the other side of an argument can help reveal blind spots and lead to wiser decisions in investing, leadership, careers, relationships, and life.
Why We Chase What Is Visible and Miss What Is Valuable
One of the most interesting ideas in the conversation is Alex’s discussion of salience. Human attention naturally gravitates toward information that is vivid, visible, recent, and easy to quantify. In financial markets, that can mean a dramatic announcement, a rapidly rising stock price, or a highly publicized trend captures attention while less visible information remains in the background.
Alex connects this idea to the way markets evaluate companies. Some of the factors that contribute to long term value are difficult to see on a balance sheet. Employee satisfaction, corporate culture, reputation, innovation, and human capital develop gradually and often lack the immediate visibility of financial metrics.
That creates an important tension. The information that attracts the most attention is not necessarily the information that has the greatest long-term significance. Alex’s research into employee satisfaction illustrates how something that appears qualitative or difficult to measure can still contain meaningful information about a company’s future performance.
This idea extends well beyond investing. In our own lives, we can become preoccupied with what is measurable, immediate, and publicly visible while overlooking quieter forms of value that accumulate over time. The things that matter most are not always the things that make the most noise.
When the Crowd Loses Its Mind: Inside Alex Edmans’s New Book
There is a moment in our conversation when the discussion of individual bias starts to feel much bigger than investing. We are talking about Isaac Newton, one of the greatest thinkers in history, and how even he became caught up in the South Sea Bubble. That story provides an almost perfect entry point into Alex Edmans’s new book, The Madness of Markets, because the book begins with a deceptively simple observation: the people moving financial markets are human beings, and human beings bring their emotions, biases, stories, and social instincts with them.
Alex’s curiosity about this subject grew from an unusual place. While studying financial markets, he began noticing evidence that investor behavior could be influenced by things that traditional financial models would have difficulty explaining, including mood and even the outcome of sporting events. That line of inquiry eventually became part of a much broader investigation into why markets can overreact, underreact, or misreact to information. His new book, published in September 2026, takes those ideas and turns them into an accessible exploration of the psychology behind bubbles, crashes, hype cycles, and collective investment behavior.
What makes the book especially relevant to this conversation is that Alex isn’t simply interested in cataloguing the ways investors behave irrationally. He is interested in what we can learn from those mistakes. The Madness of Markets examines how narratives, emotion, social contagion, and our tendency to focus on salient information can push prices away from underlying fundamentals, while also exploring how investors can recognize those moments and make more disciplined decisions.
That brings us back to something Alex says near the end of our conversation: “See the other side.” The advice applies beautifully to his book. When everyone is captivated by the same story, chasing the same opportunity, or reacting to the same piece of information, the interesting question may be what the crowd has failed to notice. Sometimes the opportunity lies in examining the assumption that everyone else has accepted.
And that is ultimately why The Madness of Markets extends beyond finance. You don’t have to be a professional investor to recognize the psychology Alex describes. We all make decisions with incomplete information. We all develop narratives about what is happening. We all encounter moments when confidence, familiarity, social pressure, or fear of missing out can quietly influence our judgment.
The book becomes a kind of laboratory for understanding those tendencies. Markets simply make the consequences unusually visible. A price moves, a crowd follows, a story spreads, and suddenly millions of individual decisions become a collective force. Alex’s invitation is to step back from that momentum long enough to ask a more useful question: What am I seeing, and what might I be missing?
Why Stories Can Override Evidence
Alex’s work also explores our attraction to stories and the way narratives influence judgment. A compelling story can make a complex situation feel understandable because it gives events a beginning, a cause, and an outcome. The difficulty arises when the emotional power of the story becomes stronger than the evidence supporting it.
A single example can feel more convincing than a large body of statistical evidence because we can visualize it and remember it. This is one reason stories can be so persuasive in investing, business, and everyday life. We often remember the person who became wealthy from a particular investment while forgetting the many people who made similar choices and experienced very different outcomes.
Our existing beliefs can make this even more powerful. When a story confirms something we already believe, we are more inclined to accept it. Evidence that challenges the story requires more intellectual effort because it asks us to reconsider a conclusion we have already incorporated into our understanding of the world.
For Alex, becoming a better decision maker therefore requires more than collecting information. It requires examining how we select, interpret, and emotionally respond to that information.
How Seeing the Other Side Can Improve Your Decisions
The conversation ultimately moves from diagnosis toward a practical habit. Alex’s advice is simple: “See the other side.”
The power of this idea comes from its ability to interrupt the natural momentum of our own thinking. When we feel confident about an investment, a career decision, a relationship, or an important judgment, we can deliberately ask what someone who disagrees with us might see that we have overlooked. The exercise creates space between our first conclusion and the decision that follows.
Alex suggests taking this a step further when we cannot evaluate the opposing perspective objectively ourselves. Find someone you trust who is willing to disagree with you and ask that person to make the strongest possible case for the other side. The purpose is not to create disagreement for its own sake. It is to expose information and perspectives that our own biases may have filtered out.
This principle brings together many of the ideas we explore throughout the episode. Confirmation bias becomes easier to recognize when we actively seek contradictory evidence. Anchoring becomes easier to challenge when we question our initial reference point. Herd behavior becomes less powerful when we deliberately step outside the consensus. And the stories we tell ourselves become easier to examine when we invite someone else to question the narrative.
Ultimately, better decision-making is less about becoming perfectly rational and more about becoming aware of the conditions under which our judgment is most vulnerable. Seeing the other side gives us a practical way to create that awareness, especially when the stakes are high, and our own certainty feels strongest.
Discover The Mattering Effect: The Next Big Idea for a Life That Matters
Understanding how our minds make decisions is one part of living intentionally. The other is understanding what makes those decisions meaningful.
In his upcoming book, The Mattering Effect, John R. Miles explores the human need to feel that we matter and the role that mattering plays in how we experience belonging, purpose, relationships, and a meaningful life.
The ideas in this conversation with Alex Edmans create an interesting connection. Alex asks us to examine the assumptions that shape our decisions and deliberately seek perspectives that challenge our blind spots.
The Mattering Effect extends that spirit of intentionality into another fundamental question: How do we create lives and relationships in which people genuinely know that they matter?
If you’re interested in going deeper into these ideas, join the Next Big Idea Club and explore the thinking behind The Mattering Effect alongside the broader Passion Struck philosophy of living with greater intention.
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About Today’s Guest, Alex Edmans
Alex Edmans is Professor of Finance at London Business School, where his research focuses on corporate finance, responsible business, sustainable investing, and behavioral finance. He earned his PhD in Finance from MIT Sloan as a Fulbright Scholar after graduating from Oxford University and previously worked in investment banking at Morgan Stanley. He later joined the Wharton faculty, where he became a tenured professor before moving to London Business School.
Alex has spoken at the World Economic Forum in Davos, testified before the UK Parliament, and presented to the World Bank Board of Directors. His TED talk, “What to Trust in a Post-Truth World,” and TEDx talks have reached millions of viewers. His work has appeared in publications including the Wall Street Journal, Financial Times, The Economist, and Harvard Business Review, and he has been featured by major international media outlets.
He is the author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit, May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases—and What We Can Do About It, and The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them. He has also coauthored the widely used finance textbook Principles of Corporate Finance. His work has earned numerous teaching awards, and he has served in leadership and advisory roles across the finance and responsible investment communities.
What Makes Smart People Make BAD Decisions? Alex Edmans on Human BIAS
Learn More and Connect
👉 All episode links, my books You Matter, Luma, and The Mattering Effect, The Ignited Life newsletter, and the Start Mattering store are here: linktr.ee/John_R_Miles
FAQ (Frequently Asked Questions)
Why do smart people make bad decisions?
Because intelligence does not eliminate cognitive biases, emotions, social influence, or the tendency to interpret information through beliefs we already hold. Alex’s discussion of Isaac Newton illustrates how even extraordinary intelligence exists alongside ordinary human psychology.
What is confirmation bias?
Confirmation bias is the tendency to interpret new information in ways that support beliefs we already hold. Alex explains that we often begin with our own vantage point and then selectively interpret evidence through that perspective.
What is anchoring bias?
Anchoring occurs when an initial piece of information disproportionately influences subsequent judgments. In financial decision-making, an earlier price, estimate, or expectation can become a reference point that shapes how we evaluate everything that follows.
Why does herd behavior make decision-making worse?
When people share the same biases, their mistakes can reinforce one another rather than cancel out. Alex explains that financial markets are particularly susceptible because investors can observe what others are doing and become emotionally attached to particular investments.
Why do people make emotional decisions and then rationalize them?
People generally want to understand themselves as rational decision makers. After making an emotionally influenced decision, they can therefore construct explanations that make the decision appear more analytical than it originally was. Alex connects this pattern to investors who remain attached to losing investments while developing rational-sounding reasons for holding them.
How can I make better decisions?
Alex’s most practical recommendation is to see the other side. Identify the strongest argument against your position and consider what someone who disagrees with you might see that you have overlooked. If you cannot evaluate the issue objectively yourself, ask someone you trust who is willing to disagree with you to make that case.
Will AI eliminate human bias?
Alex argues that human bias is likely to persist even as AI improves market efficiency. As AI takes over more quantitative evaluations, human biases may increasingly appear in the qualitative decisions that remain under human control.
