Why do smart investors make crazy decisions? Listen to Jason Mitchell discuss with Professor Alex Edmans, London Business School, about what markets are really pricing; why they get it wrong in systematic and predictable ways; and how we can become better investors, better thinkers, and maybe even better stewards of the future.

Recording date: 02 September 2026

Alex Edmans

Alex Edmans is Professor of Finance at London Business School and one of the world's leading voices on corporate purpose, sustainable investing, behavioural finance, and corporate governance. He is the author of the bestselling books Grow the Pie: How Great Companies Deliver Both Purpose and Profit and May Contain Lies, and co-author of the classic finance textbook Principles of Corporate Finance. His latest book, out this month, is Madness of Markets: Why Smart Investors Make Crazy Decisions – And How to Exploit Them.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I'm Jason Mitchell, CIO for Responsible Investment at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow. Hi, everyone. Welcome back to the podcast and I hope everyone is staying well. So this is going to be a bit of a left field intro to this episode, but stick with me. There's a book called Save the Cat. It's basically one of the Bibles of Hollywood screenwriting and it introduces a simple idea. For an audience to really care about a protagonist, that character needs to try to save something early on, something vulnerable, something worth protecting. It's basically the moment that tells you this character has a stake in something bigger than just themselves. For instance, if you've ever seen the movie Alien, Ripley literally goes back to save the ship's cat. Or in How to Save the Dragon, Hiccup refuses to kill Toothless. Instead, he studies the dragon, understands it, and perhaps most importantly, he improves what's broken.

Now, I haven't had this specific conversation with Alex Edmonds, but I genuinely think there's a Save the Cat moment running through his entire body of work. When Alex writes about the death of ESG or the death of DEI or the biases of sustainable investors, he's not just reporting on it or trying to demolish it. I believe he's doing it because he cares, because he sees something worth redeeming. And so he's trying to rescue these ideas from some of their own worst excesses, greenwashing, black and white thinking, political capture on both sides, ultimately to improve what's broken. Is Alex trying to save ESG from itself? I don't know if I'd go that far, but his new book, The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them suggests the stakes are actually bigger.

In other words, he's trying to save investors from themselves. Alex's twist here is that the madness is systematic and because it's systematic, it's predictable. And because it's predictable, it ends up being exploitable because it's driven by humans with deeply ingrained biases. And if there's another through line across all of Alex's work, it's this, rigour over rhetoric and evidence over ideology. And in a field that too often confuses good intentions with good analysis, that counts a lot in my mound. So it's great to have Professor Alex Edmonds on the podcast to discuss his new book through, call it the lens of sustainable investing. We talk about what markets are really pricing, why they so often get it wrong and how we can become better investors, better thinkers, and maybe even better stewards of the future. Alex is professor of finance at Lennon Business School and one of the world's leading voices on corporate purpose, sustainable investing, behavioural finance, and corporate governance.

He's the author of previous bestselling books, Grow the Pie: How Great Companies Deliver Both Purpose and Profit and May Contain Lies. And he's also co-author of the classic finance textbook, Principles of Corporate Finance. Welcome to the podcast, Professor Alex Edmonds. It's great to have you here and thank you for taking the time today. I was going to add, this is basically your third time on the podcast, which kind of makes you a bit of a hat trick of sorts for us.

Alex Edmonds:

It's great to be here, Jason. I really appreciate you inviting me back.

Jason Mitchell:

Absolutely. So Alex, as I said, this marks the third podcast we've done together across your three books. And it's I guess really interesting to think about the through line, the thread across all three of those books. And your first book, Grow the Pie, remember kind of recording that during COVID, you make the case that companies can create value for shareholders and society that it's basically not a zero-sum game. In may contain lies, you warned us to be sceptical of the evidence behind our beliefs. And now in madness of markets, you argue that markets themselves are systematically irrational. In other words, grow the pie was constructive, may contain lies, introduced a bit of suspicion, and madness points to a kind of a behavioural pathology underlying all of this, if I've got that right. So to start off, I've got two questions. First, to what degree does this book complete a trilogy of sorts or am I just misreading it in terms of imagining this arc?

And second, more to the point, has writing it changed how confident you are that markets will eventually get sustainability right? Or has it made you more pessimistic that let's call it ESG mispricing is a structural phenomenon rather than a temporary one?

Alex Edmonds:

Well, first, I'm actually quite glad, Jason, that you found it difficult to find a common theme because there are some authors who get accused of writing the same book three times, so I'm happy not to fall into that category. But joking aside, there is a common theme to the books which might be a bit hidden, which is psychological biases. So this might not seem as obvious in my first book, Grow the Pie. So let me talk you through my motivation for writing that book. So I moved back to the UK in 2013 to get much more involved in policy and practise, and the natural alignment for me was the responsible business movement or the purposeful company movement as it was known back then. And I was really grateful to be engaged in a lot of those discussions. But what I found was some pretty strong propositions, which is the argument that business and society are completely at odds with each other.

And so the purposeful business movement was saying, "Well, let's completely change company law so that director's duties are not for shareholders." The view that asset managers are evil and exploitative and after short-term returns, that CEOs are always overpaid and that share buybacks are a bad thing. And so this is what I later wrote in May Contain Lies, two phenomena. One is black and white thinking, viewing something as always good or always bad, and also confirmation bias. You have a view of the world, which may be that I think investors are value extractive and I will view any evidence as supporting that view. So while Grow the Pie was indeed a constructive book, why it aimed to be constructive is it suggested that business and society can work together collaboratively. So absolutely companies need to consider wider societal impact. But on the other hand, if you want to stand up for society, stakeholders, customers, employees, actually the solution is not necessarily to restrict business.

So it was a much more pro-business and pro-society, a both and argument than some of the arguments that I viewed was seeing at the time. And it was the psychological bias that I was trying to argue against by writing a more balanced book. Then this led to May Contain Lies. So I broadened this out to many other topics way beyond business, such as say black and white views on breastfeeding or Atkins diet or confirmation bias in the evidence and climate change. And then where am I going with this third book to complete the trilogy? Madness focuses more on investing and why do I care specifically about investing? Is this a decision which affects many people? So for you as an investor in your day job, this matters, but even if your day job is something different, you will invest your family's money for their future, you'll invest for retirement.

But while it narrows and focuses the domain from breastfeeding and climate change to just one field which is investing, it broadens out the psychological biases, not only black and white thinking and confirmation bias, but other things such as overconfidence or the narrative fallacy or the disposition effect or anchoring. And it discusses all the ways in which seemingly smart people, including myself, make poor decisions within the realm of investing. Then if I go to your second question, well, given that I believe there are so many serious biases out there, it may not surprise you to hear that I'm quite sceptical that markets might get sustainability right. So what I've written about in the book is that the mistakes that we see are a feature of markets rather than a bug. It's not something that just occurs randomly in that if I toss a coin a hundred times, there will be streaks of five heads or four tails.

Because markets are driven by humans and humans are affected by psychology, we have seen bubbles and crashes and market mistakes systematically over time. And so this does give me doubt as to whether sustainability will be fully priced going forwards. And while that might seem a rather pessimistic view, it's actually optimistic for active asset managers because if something is not fully priced in, then this gives you a way of beating the market.

Jason Mitchell:

Really interesting. I actually want to dig in a little bit more on this idea of is it a feature or a bug of markets specifically in regard to sustainability? And one thing I really like about your book is that it draws on a lot of examples, concrete ones in the sustainability space like EVs, employee satisfaction and the carbon premium. If you pull back from all of that a bit to get to that kind of question of feature versus bug, is sustainability investing particularly prone to market madness, especially all the narrative fallacies you wrote about in May Contain Lies? I've though a lot and am thinking a lot about this, but is it because the field is relatively nascent or that the stakes feel in some way morally higher or because ESG has tried to be both ethically important and financially material at the same time?

It always seems to me that writing about say the end of DEI or climate stewardship carries certain political connotations. I think we can all agree with that. And I'm going back to that idea that the stakes are higher versus say a quant researcher writing about time series variation and the factor zoo.

Alex Edmonds:

I think you've hit the nail on the head. I think the fact that the stakes feel morally higher and that there's political implications may mean that we are even less likely to analyse the data in a rational way than you might do other drives of stock return. So let's give some examples. So climate change, for example, that is seen as a political issue. So the documentary An Inconvenient Truth I thought was full of facts and data and evidence and was convincing, but because Al Gore was associated with it, some on the Republican end may think, "Well, if I'm going to be a true Republican, I need to be sceptical about climate change. And by extension, I need to be sceptical about all forms of ESG investing and view this as woke."

So even though there is evidence suggesting that some ESG factors do improve long-term financial returns, because that would challenge my ideology, I might ignore those factors, which may well be why they continue to be mispriced. And on the flip side, if you are an ESG advocate, you might think, "Well, all ESG investing is going to create value and earn abnormal returns," not realising that we might be in an electric vehicle bubble or a green hydrogen bubble that certain things might get overpriced.

So what I've just discussed was the implications for financial returns and how ideological biases may skew our views on whether sustainable investing adds or subtracts financial value. But let's stand in the corner of sustainable investing folks. They may argue, "Well, we've got other motives for investing which are non-financial." It may well be, "We're doing this for impact reasons."

So the reason why I am buying into clean energy isn't just because I believe that these are going to earn outside financial returns, but because I want to have positive impact, I want to reduce their cost of capital. Now, it is absolutely fully rational to have non-financial goals, but even if you have non-financial goals, I would like to evaluate those rationally. Is it indeed the case that buying into a green industry is going to necessarily reduce its cost of capital? Actually, the evidence is much less clear than you might think. I know that you've had other guests on your podcast who cast doubt on that, so I'm not going to repeat those arguments. A final reason for investing is values. So this is similar to impact, but distinct. So this might be the idea that I want to invest in clean energy just because it reflects what I would like to see in the world.

Even if I have no impact on the cost of capital, even if I do not create any real world change, I feel good by investing in clean energy. And similarly, I don't want to hold tobacco stocks. Even if I don't think that divestment will increase their cost of capital, I just think it's morally wrong to hold tobacco stocks. And so that is also a reason that you might want to engage in sustainable investing. And I think that reason is completely rational. It's fine to have non-financial motives, but I think often these reasons become conflated is some people will say, "Well, as a sustainable investor, you are completely irrational because you are buying into a sector which sometimes may be overvalued, not realising that you may have non-financial objectives such as investing in companies that reflect your values."

Jason Mitchell:

Let's move to the inverse of this conversation because you talk about the US anti-ESG backlash, how it's manifested into things like Strive's DRLL, the Texas divestment from BlackRock, ETFs like YALL and MAGA, and how it's rooted in zero-sum thinking about ESG. To what degree is the anti-ESG movement itself an example of market madness? In other words, a narrative-driven overreaction to a politicised label instead of a rational reassessment of ESG's financial merits?

Alex Edmonds:

I think this depends on whether you are evaluating the asset management firms or the end investors in the funds, because you could argue that the asset management firms such as Strive are being completely rational. They are not overreacting. If there is indeed some end investor demand for funds like DRLL, then you should be launching them. But if that is your view, then you need to be fair. You shouldn't necessarily criticise sustainable asset managers for launching ESG products. So some argue, "Well, this is just a massive gravy train for the ESG industry." But if there is indeed end investor demand for this, it is completely fair for asset management firms to launch green funds as long as they're honest and not misrepresenting impact.

Now, my answer's different if you are looking at the end investors. So is it rational for them to buy into YALL and MAGA funds? Again, it depends on what your objectives are. So let's say your objectives are financial. The answer is, well, yes for some, but not for others. So some ESG factors are overpriced. So sadly, I wish my research didn't find this, but my research does find that companies that emit more carbon have historically earned higher returns. And so yes, if you were to have bought into a DRLL fund, maybe you would've earned high returns.

But on the flip side, some ESG factors actually do improve returns such as employee satisfaction. So if you were to say, "I want to not invest in any ESG factor," you are blinding yourself to some potential drivers of long-term performance. Second, what if your goal is impact? Well, as I mentioned earlier, impact is unclear. So just like it's not clear that you can significantly reduce a company's cost of capital by buying into clean energy, the idea that I'm going to be supporting an oil and gas burn by buying more of its stock, again, that is not clear either.

Finally, what if your message, what of your goals are values? I just want to invest in a Republican MAGA fund because it reflects what I want to see in the world. That's completely fine for you to do that, and it's rational if that's your objective. But again, be fair, by the same token, don't criticise people who invest in green funds because it reflects what they want to see in the world. So there's a common argument, which is our sustainable investing is a complete con, these funds do not have impact, they just make people feel good. However, if indeed your reason for investing in a MAGA fund is it makes you feel good, it reflects what you want to see in the world, it's completely rational for investors to buy green funds because it reflects what they see in the world. As long as they're not misled about the impact of those funds, it is fair for them to want to buy some funds that reflect their values.

Jason Mitchell:

Got it. I'm going to come back to the cost of capital and Green versus Brown firm discussion very shortly. But first, chapter six in the book revisits your early finding that employee satisfaction, you just mentioned it, wasn't priced into stock returns for years. Let's call it the best companies to work for anomaly, alongside implications for intangibles like brand, culture and human capital more broadly. In my mind, it's all super, super interesting, especially in the context where there are a lot of academic studies that review alpha factors and they typically see them decay after publication of the article. In other words, investors read these papers, they exploit the information, and the signal diminishes in strength, call it an extension of the efficient markets hypothesis. But why do you think the best companies to work for alpha hasn't seen a similar decay? My own sense is that human capital, especially from our own research around H-1B visas is a proxy for a firm's investment into its workforce, still kind of represent a sort of free lunch in the market, which should either be obviously rare or not really exist.

I mean, we hear axioms like people are our greatest asset and there's serious academics like yourself, Cam Harvey at Duke, Luigi Zingales and others doing really rigorous work in this area, but it seems like practitioners generally tend to overlook it. So how do you reconcile this kind of dissonance? And more to the point, if markets still can't price something as measurable as the Fortune 100 best companies to work for list 15 years after your first paper, what hope do you think there is for markets to correctly price genuinely soft sustainability factors like biodiversity risk or supply chain labour practises?

Alex Edmonds:

Yeah, so I think this is quite strange. There could be three potential justifications for this. So number one is the fact that employee satisfaction is seen as a sustainability ESG factor, and therefore it's intertwined with the ideology and the political narratives that we just discussed. If indeed you view this as woke, then you will ignore this. You might say, "Okay, maybe Alex Edmonds got lucky with his research over 15 years and maybe things are going to be different in the future." Or perhaps more moderately, you might say, "Okay, human capital mattered in the past, but now it's second order compared to other things like artificial intelligence. With AI now, maybe human capital doesn't really matter anymore because AI can do the jobs that humans used to do previously." So it may well be that people do not view human capital as important now, even though we have that research because of ideological reasons or viewing the world as having changed.

But the second reason is more nuanced, is that people may recognise that human capital matters, but they might measure it in the wrong way. So they might say, "Well, one measure of a company's corporate culture is demographic diversity, the percentage of ethnic minorities or women on the board of directors or throughout the wider workforce." And unfortunately, those measures are not positively correlated with stock returns in any convincing study that I've seen. Or they may instead look at the pay ratio, they might say a lower gap between the CEO pay and the pay of average workers. That's a sign of a more egalitarian and fair corporate culture. However, that, if anything, is negatively linked to future stock returns. The third reason is more nuanced still, which is it is important and I know how to measure it. I may look at measures such as the hundred best companies to work for.

I might scrape Glassdoor for not only ratings but textual reviews, but I don't really know how to price it. So the company has just announced sales growth, which is 1% higher than market expectations, maybe I'm going to increase my sales growth lines in the Excel spreadsheet by 1%. But if I know a company has a stronger corporate culture, how do I really change cell C23 in my Excel spreadsheet? I might think, "Well, that's great for the company, but I might not really do anything about it in terms of my valuation."

And so given that, I think all of those three reasons are reasonably coherent reasons for why you might see mispricing, I am also like you, sceptical that soft sustainability factors will ever be fully priced into the market. Either you'll have some sceptics doubting it, perhaps in political ideological reasons, or you might have people who can't measure it, or you might have people who can measure it but don't know how to incorporate it. And again, while that might seem pessimistic, it's actually good news for investors who get it right because this is not something which is going to be fully priced in.

Jason Mitchell:

Yeah, it is super interesting. I mean, I agree with you that most practitioners basically take a risk-based approach around human capital. Like you said, they kind of think about gender pay gap or health and safety issues or human rights violations, which are necessary but almost kind of a dot box ticking exercise, but it's not necessarily returns focused. I do have to give him some credit. I'm speaking of Dan Ariely, who's a past guest, and full disclosure, I recognise the academic controversy around his research, but just in terms of someone who's actually tried to implement that more of a returns focused approach around human capital, he's obviously done some work, but it's weird that it hasn't warranted more attention. And again, when I go back to your research 15 years ago, I sort of kind of slapped my head and go, "Wow, this is a weird, rare example of a tiny free lunch in the market that isn't being exploited."

Alex Edmonds:

Yes. I think people historically thought of ESG sustainability factors as only cost centres, as good risk management. So yes, people agree, if you have a really bad workplace culture, then people will quit or you might get some lawsuits. Similarly, if you have a bad environmental record, you could get a fine. But people thought, "Well, let's do the minimum possible to avoid a scandal. There is no real incentive for us to go above and beyond and to be in the top tier."

And so this is why my work and the work of Dan's fund tries to highlight, no, some of these factors can be profit centres. If you are going above and beyond in how you treat your workers, then you have a vibrant corporate culture. People are more likely to stay, they're more likely to go above and beyond the job description. So I think the economic arguments for why this can add value can be very compelling. But about 20 years ago when I first started doing the research, people were sceptical about it. I reviewed most recently one of the rejection letters I got from a top journal which said, "This paper is a clear reject. There is nothing important in this paper. People just didn't view human capital as being key compared to more quantitative drivers of returns."

Jason Mitchell:

Really interesting. I guess to turn back to the green-brown cost of capital issue, I like how you sort of applied the Hartzmark-Kelly Shue paper, counterproductive sustainable investing to the Travellers versus Martin Marietta example to demonstrate how a Brown firm can deliver larger absolute emission cuts versus a green firm that often gets credit for change in percentage terms. Kelly has obviously been on the podcast a few years ago, and again, I think it was a really, really important paper. I think by extension though, I'd sort of point out that the Gormsen-Huber paper, Climate Capitalists, I think published around a year and a half or two years ago, again, shows that same mechanism on the cost of capital side, i.e. sustainable AUM flows raised brown firm's cost of capital, at least the perceived cost of capital, not the implied cost of capital, and lowered green firm's cost of capital.

But basically sustainable investors, if you summarise those papers, sustainable investors preach the merits of transition, but let's face it, they end up financing the opposite, the counterproductive kind of sides. Besides being counterproductive, what kind of madness is this? How do you assess or kind of weigh this? Is this a crowding effect, a framing air that confuses relatives for absolutes, obviously to some degree or something else? And more importantly, what's the fix? I can think of some obvious ones, but is it simply tilting towards improvers instead of leaders or is it something more structural from a research perspective?

Alex Edmonds:

It is indeed something as simple as investors mistaking relatives for absolutes. And you might think, "This is crazy. How can the market get something so basic so wrong?"

But this is, I think, a great hallmark of Kelly Shue and Sam Hartzmark's research more generally actually cover many of their papers in the book where they take a seemingly basic mistake and show that this is something that the entire market, or at least a large proportion of it, gets wrong and it has very major implications. So what is the mistake here and what are the implications for those who haven't listened to the earlier podcast episode? So in 2021, Travellers, the insurance firm, emitted one tonne of carbon per million dollars of revenue, whereas Martin Marietta emitted 1,000 tonnes per million dollars. And so why is that important? So if Travellers cut its emissions by 100%, then that is equivalent in terms of tonnes of carbon to Martin Marietta trimming just 0.1%.

So there might be some investors who say, "Well, let's put my money into Travellers and I will be able to finance some big carbon reduction by 100%. I'm making a huge impact in wider society."

When actually they should be putting their money into Martin Marietta because even if they reduce their carbon emissions by only 1%, that's actually 10 times the impact that they would've had on the first company. And so this is the concern with mixing absolutes and relatives. So how can so smart people mix those things up? Because in many cases, it is percentages that matter. So if I compare bank accounts, I would always want to put my money into a bank account yielding 2% of interest rather than something yielding 1%. And why I'm fine for just looking at the percentage interest rate rather than dollar amount of interest is the base is the same.

I'm investing $100 in either bank account, so 2% on $100 is obviously greater than 1% on $100. But for carbon, the baseline is different. So because Martin Marietta's baseline carbon emissions, the emissions that it's emitting right now are so much higher, then a small percentage reduction actually translates to a much bigger absolute reduction than if you were to put your money into Travellers. So what is the fix? I think if indeed the mistake is simple, then the silver lining is the fix might be simple. Look at the absolute number of tonnes. Or if an investor wants to try to report its impact, try to look at this in absolute terms, not just percentage terms. Why? Because the issue of climate is we care about the total number of tonnes in the atmosphere, not percentage reductions.

Jason Mitchell:

Really interesting. If I can add for a second, not to geek out too much on this research, but one of the things I really appreciate about the Gormsen and Huber paper is one of the first exhibits in the paper, I'm not sure which one it is, but it's where they apply, let's call it the general theory around counterproductive sustainable investing and the implications for asset flows over at least roughly a 20-year period. And you find that early on, asset flows are fairly flattish and the perceived cost of capital, that's the cost of capital that the companies themselves report, it's not the implied cost of capital from the market, but for both green and brown firms run fairly tight together up until 2015 when they then start to diverge. At the same time that sustainable AUM starts to shoot up almost asymptotically. There's some hyperbole in there, but it does shoot up.

And in retrospect, the answer is pretty obvious. It was the Paris Accord that occurs in November 2015, and that ends up mobilising and cohering, let's say, sustainable investing capital flows, which really starts to drive the wedge between green and brown firm cost of capital. So I'm a big fan because the paper seems to tie the loop in many respects around this kind of long-running cost of capital discussion by showing the real world asset flow implications, which is now obviously pointing out the vulnerabilities in the tightly, I'd say very tightly constructed indices like the Paris Alliance benchmarks who are now underperforming and starting to see big spikes in tracking error.

Alex Edmonds:

Yeah. So why I find this so bizarre and so rational is it's actually quite different to the approach that we'll have in so many other areas of the real world besides outside of investing. So outside of investing, if you are a doctor, you want to treat the sick patients, not the healthy patients, and we see a good employer as one that might take a chance on people with unfulfilled potential. So there is a social enterprise that I invest in which will hire ex-offenders. Why? Because an ex-offender may have a huge amount of unfulfilled potential because they might be overlooked by the general labour market. So if you were just to achieve 10% of that potential, that is a lot in terms of human capital units.

Whereas the approach that some sustainable investors might have is let's go for the healthy patients, not the sick ones. Let's invest in travellers because it's so green rather than Martin Marietta, even though you can have a much greater impact in absolute terms on a company which is emitting a lot than one which is already clean.

Jason Mitchell:

Yeah, it's a really good analogy. I'm jumping around a little bit, I confess, but I want to go to chapter eight where the notion of the big market delusion kind of captures the 2021 EV mania when Tesla, Neo, Nicola and Pierce were collectively valued, as you point out, roughly I think 1.5 trillion against a $1.1 trillion total market opportunity for the entire legacy auto industry. As you write, it kind of implies that everyone wins, everyone sort of walks away with a medal. Given the capital that's flowed into clean energy, hydrogen and climate tech since, are we watching a live big market delusion in the energy transition? I get Damodaran's point around the big market delusion. Isn't this more about price discovery and markets sorting out a fast growth industry with imperfect information about who's best positioned and ultimately wins? And practically, how should long horizon sustainability investors size positions to avoid these crowding effects?

Alex Edmonds:

First I'll say I'm glad that you're jumping around and you shouldn't apologise for that because just as I said, some authors get accused of writing the same book three times. The self-help industry in particular is said to have one great idea that you then drag out over 300 pages. So all the chapters are the same. Whereas here, why I find market psychology so interesting is mistakes can manifest in so many different ways. So the different chapters of the book are quite discreet and different from each other, which show different ways in which markets may be mispriced. Let me get back to the question at hand, are we in a clean energy bubble? So I was recently on the Global Future Council of the World Economic Forum, the Future Council of Responsible Investing. And the final meeting that we had before the council sunset was one in which one member brought up the idea of fossil fuels and made a strong passionate case for them and then got lots of pushback.

And people said from an investing standpoint, "No, this clean energy company has outperformed and this brown energy firm has underperformed."

And then she responded by saying, "No, here's a counter example."

They were using anecdotes to argue their side. And then I just pulled up the data and I pulled up the iShares Global Clean Energy Index. And then unfortunately this has significantly underperformed any benchmarks. So between 2021 and 2025, it returned 37%. The S&P 500 returned 96%, the MSCI World returned 81%. So what that suggests is perhaps five years ago we were in a big market delusion that industry as a whole was overvalued and then has subsequently corrected. But then the question is, are we in a big market delusion right now because there has been a correction? Well, again, this is not fully clear because even though there has been a correction over the last five-year period in 2025, this index rose by 47%, much higher than the S&P 500 or the MSCI.

So while there was a correction, maybe we could be back into big market delusion bubble territory where the value of the industry as a whole is too high. But then to your question, what should a long horizon sustainability investor do? So you believe that clean energy is going to be the future. You don't want to buy the entire sector because the entire sector is too richly valued. I think it's then really important to try to evaluate individual companies and see, well, which company you want to invest in based on its pricing, based on the quality of its technology, based on the quality of its management. So often people get so dazzled by the sector that they say, "Oh, because it's clean energy, I'm going to buy into this."

And this is the behavioural bias of categorical thinking, not realising that within a very attractive sector, there could be individual unattractive players. And also to avoid the risk of fear of missing out because you might think, "Well, let me buy every single company within this sector so that the company that ends up being the big winner, I am definitely going to be holding this."

But if the industry as a whole is overpriced, you don't want to buy every company within the sector. So I'm going to give the difficult and unpleasant advice that we really do want to be discerning and show restraint and not invest in every company within this sector. It is much more difficult to try to invest in only one or two companies and to weed out the others. But when the whole sector may be overvalued, I think that's the only way of avoiding the big market dilution.

Jason Mitchell:

Interesting. You describe this idea of catering. Essentially CEOs leaning into hype they know is nonsense to sustain an inflated share price. And you give some examples, AMC's free popcorn meme and telecom firms sinking billions into fibre optic capacity that sat empty in the early 2000s. Something I do want to note, by the way, that I witnessed or happened to witness firsthand as a young sell side analyst at Credit Suisse covering the telecom sector back then. But to what degree do you think a similar catering dynamic, if you want to call it that, could be distorting real capital allocation in sustainable industries right now to satisfy, again, an investor narrative rather than the underlying unit economics? I'm throwing out technologies and again, I don't expect you to have kind of a nuanced view on them, but is it hydrogen or carbon capture, grid scale storage, et cetera?

Alex Edmonds:

I think this is a real concern. And why do I think it might be a concern? Because it is a manifestation of something that we have seen time and again in other sectors in other periods of time. And again, this is why I view investor psychology and the madness of markets as being so compelling. These are things which tend to recur, suggesting there's underlying psychological forces behind it. So what is the issue at the moment? It may well be that there's a lot of enthusiasm for sustainability for very good reason, which this is going to be the future. We care a lot about climate change and we want to support any company which is going to be engaging in mitigation or adaptation. But often investors may forget about one of the most basic rules of finance, which is pricing. So even if a company is excellent, this doesn't mean that it's going to be an excellent investment because of all the growth prospects of the company already priced in or more than fully priced, we don't want to buy it.

And so sometimes we have such enthusiasm for sustainable companies that investors don't realise that these companies are really expensive and so they may pour even more capital into them. And so what specifically could this lead to in terms of over-investment? One example could be green hydrogen, as you suggest, and electrolyze the manufacturing. So here there's a lot of capital flowing into this. And then in response to the very generous provision of capital, this then allows a lot of these companies to expand their capacity. But the hydrogen market I believe is developed much more slowly than the expansion of capacity. We might also see this in terms of solar panel manufacturing. Again, we've seen a large expansion in capacity financed perhaps by cheap capital, by investors being overly exuberant about the solar sector. And this has led to capacity extending much faster than installations. I think there's a lot of overcapacity, particularly in China.

Now notice that this ironically may not be bad for wider society because if this overcapacity means that prices will have to come down, that might actually speed up adoption. But the investors who financed it because they were overly exuberant, they are losing out. So they are providing the "government subsidies" that the government perhaps should be providing in order to encourage adoption. But here the investors are providing it because they're providing too cheap capital.

Jason Mitchell:

There's a real irony that I appreciate in one of the chapters in your book where you talk about how weather, daylight savings, even seasonal effective disorders that moves returns through investor mood. It's one of the sort of invisible forces that I really appreciate. In fact, actually, as an aside, it reminds me of the anecdote that James Talbot at the Bank of England kind of talked about wherein historically the Bank of England had a weather vane to monitor the winds up the Thames, which would increase commercial activity. But back to your book, you talk about how weather can have little to no fundamental information and how that can affect prices today. Well, I guess ironically, climate change may increasingly affect actual changes in fundamentals tomorrow. As physical climate and weather risk becomes more visible, I'm immediately thinking about the extreme heat over this past summer. Do you ever think that markets could conflate mood-driven weather reactions with a genuine repricing of climate risk or worse, dismiss repricing as entirely a sentiment?

Alex Edmonds:

Yes, you highlight an important distinction. So the studies that I discuss on weather are about small changes in weather, so the day becoming more or less cloudy or more or less sunny, just long story short, when there's more sunshine, markets typically tend to do better. Why? Because of a sentiment story. But then your discussion about climate risk, this is something which is then manifesting in big natural disasters. It may well be that there's hurricanes or floods or fires which are caused by climate change. And that does have a fundamental effect. So it's not just an effect on emotions, this has an effect on fundamentals. And I do believe that this may well lead to a repricing of climate risk. It will lead to a reaction. In fact, it might lead to an overreaction, just like if there's an earthquake, then people start buying earthquake insurance, they over-extrapolate from this one salient event.

Now you might say, "Well, this is a really bizarre and controversial thing for me to say. How can there be an overreaction to climate? Climate change is so important. There has been insufficient reaction to it by policymakers. So anything which is a reaction is going to be in the right direction."

But why I say it might be an overreaction is that I believe these weather events are predictable. So I believe the climate science is clear. If there was not enough action on climate change, we will see climate disasters. And so when a disaster happens, I don't think the market should be shocked by it. So by analogy, I discuss in the book the fact that baseball cards, their values rise on the death of the baseball player, even though sadly, death is predictable. And for two Hall of Famers, Bob Gibson and Tom Seaver, they had well publicised illnesses before they passed away.

So the market should have noticed that the death was coming and they know that when the death happens, there's going to be an increase in the value because it's going to add to a lot of salience, but the market didn't price it in because it waits for the event. And similarly, within climate change, I think the market irrationality here is not the fact that the market will react when there's a climate disaster, is that it should not need the climate disaster to react because I believe the science here about the dangers of climate change and the importance of climate risk are already pretty close to settled.

Jason Mitchell:

Interesting. Let's talk about chapter four titled Monkey See Monkey Buy, which covers GameStop, FTX, endorsements and informational cascades through Reddit and Stock Twits. If we're honest, sustainable investing has clearly had its own retail driven cycles where when you think of the kind of clean energy ETF boom in 2020, 2021 following the Inflation Reduction Act, but do you think that the herding mechanics you write about, whether it's FOMO or social proof or cash tax, apply just as strongly to values-driven investing as to something like pure speculation? I guess as an extension, I wonder if you can make the case that impact investors could actually be more susceptible because the moral validation of the story ends up suppressing or outweighing the scepticism that would, I guess, otherwise kick in.

Alex Edmonds:

Yeah, this is a really interesting point, which I actually hadn't considered when writing the book. So when I discuss herding, I discuss herding purely with financial returns being an objective. So why do people herd? Often we think that herd behaviour is really bad, but behind every misbehaviour, there is a grain of sensibility behind it, which is why smart people make what seems to be irrational decisions. So one justification of herding is, well, I'm actually learning from information. I want to cast off my priors and learn from other people. And if other people are buying into a sector such as clean energy or cryptocurrency, I want to learn from this and copy what they're doing. But where herding can become misinformed is if I just take one single example of one friend who happen to make money in cryptocurrency and think that this means that this is an easy way to make money and I over extrapolate from them.

But what you are highlighting is actually if there are non-financial reasons for investing, there might also be herding. And again, that herding could be rational. So we've discussed the reason for investing being social norms and values. And if other investors backing clean energy companies means that there's now some social obligation or social pressure for people to support clean energy companies, then I might feel that pressure myself. And again, that pressure is not necessarily irrational. Even if there was no impact to it, if it's seen that you are doing your patriotic duty or your societal duty by supporting these companies, then maybe you should want to do it yourself. So by analogy, voting is irrational. Why? Because your likelihood of swinging an election is almost zero. It might take you an hour to go to the polling station. Yet if other people are voting and posting on Instagram, "I voted," that might pressure you into voting yourself. Why? Because you view this as now being a moral obligation.

Jason Mitchell:

Interesting, interesting. I'm going to keep jumping around a little bit, but chapter seven kind of gives this catalogue of subtle executive signals, something I'm really interested in, from AGM locations and cherry-picked analysts to the tone of the CEO on earnings calls as essentially leading indicators of future trouble. Do you think that similar, let's call them tells, could be applied to spot things like greenwashing at the top? I'm thinking of CEOs who talk maybe expansively about purpose and ESG on calls, but are behaviorally inconsistent in other areas. Is there a research opportunity in applying your, it's called linguistic behavioural kind of detection tools, whether it's causal language, voice stress, narcissism markers, specifically to sustainability markets and sustainability rhetoric?

Alex Edmonds:

Absolutely. And this is an important implication that I, again, hadn't considered before. So why is sustainability so controversial? It's because it could be done for, loosely speaking, two reasons. So number one, value creating reasons. So you are creating value for the shareholders who own your company. That value could be financial value. Why? Because many sustainable factors do enhance long-term returns as we discussed, or it could be for impact reasons. So maybe your investors also care about climate change and you are investing in clean energy. However, the other reason why you might engage in sustainability is to boost your own image. You want to be seen as the saviour of capitalism. You might be given a nighthood or damehood if you are seen as a supporter of sustainability. And you can indeed try to use some of these subtle executive signals to see, are the CEOs narcissistic? Are they people who are doing this to boost their own image rather than to do what investors want and to achieve their objective?

So there is one UK CEO who is a leading force in sustainability. Wherever, whenever I hear them speak, they always say I. They don't say the company or my team. They always refer to themselves. And this might be seen as a telltale signal that why are they a sustainable leader? It might be to boost their image. Emmanuel Faber at Danone was seen as a pioneer about sustainability, but I never heard about Faber. I didn't know who the CFO was or who the rest of the top management team was. And again, this might be a negative signal. When he announced that the company was becoming an entreprise à mission, he said, "We are now toppling the statue of Milton Friedman."

So he was much more about wanting to create history and put his name into the history books rather than necessarily saying, "Well, this is something which is going to allow us to create more long-term value."

But notice why I find corporate governance so interesting is that you don't even need necessarily to look at more subtle signals such as linguistic tone. There are some quite observable things that you can look at. So Faber was both CEO and chair, which I believe is quite rare in France. Or you can look at CEO incentives. Do they have a large stake in the companies that they are running and is that stake for the very long term? Another thing that I look at in chapter seven is does the CEO have a corporate jet? That is a good signal because that suggests, well, are they necessarily trying to add long-term value to the company or are they perhaps trying to extract perks? Can I repeat this? Another thing that you can look at and I cover in chapter seven is do they have a corporate jet? Why this is a telltale signal of managerial excess and it's linked with significantly inferior shareholder returns.

Jason Mitchell:

Super, super, super interesting. It's something I want to definitely revisit, but I want to wrap up with two questions, and these were unrelated to the book and some of your recent published articles. But in both of your recent papers, let's say, I mean the end of ESG was, I think what, two, three years old, but your most recent one, the end of DEI, which was recently published in a journal, but you effectively diagnose essentially the same pathology. In other words, a principle with genuine merit ends up getting institutionalised, reduced down to metrics and box ticking. It gets captured by specialists and politicised and ultimately triggers some sort of backlash that's as crude as the practise it opposes.

That's starting to look less like two isolated cases and more like a general theory of how corporate movements kind of die in a sense. Is this life cycle inevitable in your mind? Can well-intentioned ideas, whether it's stakeholder capitalism, net-zero purpose or human capital disclosure, can they survive contact with the physicality, the machinery of corporate implementation, investor voting policies and quarterly reporting? Or is there something structural about how markets and institutions metabolise ideas that kind of guarantees this degradation? Kind of sounds like too harsh a word, but erosion, whatever you want to call it.

Alex Edmonds:

Yes, I do think that the life cycle is quite likely. And why? I believe, again, it's down to behavioural factors and psychological biases. So when I was first in my work on sustainability and the importance of factors such as corporate culture and purpose, there's a lot of confirmation bias and scepticism. So people said, "Well, my company has been successful for decades without thinking about purpose. Why should I need to change?"

And so anything which is new, because that challenges the status quo, your confirmation bias might lead you to reject it because you want to run the company in the way that you always used to. And so it took a very long time before sustainability became mainstream. So there was academic research done. I started my paper in 2006. It got published in 2011. And then maybe around 2016, the movement became much more widespread. But then you saw a flip to the other extreme, and that is the other bias of black and white thinking. Having been sceptical about sustainability for so long, now you think, "Well, it is a panacea. It is the most important thing about a company. Let's now race to show how committed we are to sustainability. Let's try to invent all these metrics to show how much we are decarbonizing our portfolio."

And so this leads to, I think, a lot of lack of nuance on the other direction. But I do view the glass as half full, not just half empty, is that afterwards you now see a moderation. And what I see in ESG is a much more nuanced perspective on it. Why I wrote the end of DI is to highlight nuance. And I think that's also had a positive reaction where people want something which is more middle of the road in an issue which is often seen as black and white. And so this is why I've written those other articles, given I see confirmation bias and black and white thinking being so prevalent to try to push back against this and to try to have more nuanced conversations where we see something as being important, but not the only thing. And also to recognise that the most simplistic implementations may not actually be the most effective ones.

Jason Mitchell:

Interesting. Interesting. So last question. You recently wrote an article in the telegraph that closed with, in my mind, a pretty provocative statement. And look, I'll be honest, I'm going to sidestep the culture war issues. You're free to talk to them, but I want to kind of focus on something else. You wrote that academia, this is quote, "should be society's most sceptical institution. If it can't scrutinise its own heroes, it has no moral authority to instruct anyone else."

Now, if I carry that over to your new book, specifically chapter seven, which seems to argue that markets underreact to signals of unchallenged leadership like cherry-picked analysts or AGMs that don't address tough questions, some of the stuff we just talked about. But do you think in a way that tolerance for internal dissent is itself a kind of unpriced intangible? I'm not quite sure how to measure it or even fully detect it, but could investors potentially treat the presence of institutionalised scepticism as a governance factor in a way, the way they treat board independence? I mean, again, super, super hard, but I think in the abstract, it's super interesting to think about.

Alex Edmonds:

Absolutely. I think it's a very valuable intangible, and I think good corporate governance is tolerance of dissent, both internal and external. What might be external dissent? It is shareholder rights. So if shareholders are able to influence the running of a company through one share, one vote, then this means that you are listening to your outside investors. It could well be internal within the board. So if we have the CEO also being the chair, it may well be much more difficult to challenge him or her. Independent directors, there's evidence that independent directors are positive correlated with a lot of positive outcomes. There's also evidence on co-opted boards. So if directors came to the board after the CEO was appointed, then there's the concern that the CEO nominated those directors and therefore they're beholden to him or her.

But then more generally, not just at the board level, at the shareholder level, within the company, I've done some work on cognitive diversity. So does a company develop a psychologically safe corporate culture where you are allowed to challenge other people? Within your industry of asset management, we often have the cult of the fund manager where if the fund manager has a great track record, maybe their analysts think, well, they need to come up with some analysis to support the fund manager's hunch when in fact some of the best fund managers want to be told they're wrong, they want their junior staff to highlight their blind spots.

Jason Mitchell:

Got it, got it. Great way to end. Look, so it's been fascinating to talk about what markets are really pricing, why they so often get it wrong, and how we can become better investors, better thinkers, and maybe even better stewards of the future. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, CIO for Responsible Investment at Man Group, here today with Professor Alex Edmonds of London Business School and author of the new book, Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Alex, thanks so much for your time today. This has been super, super interesting. I really appreciate it.

Alex Edmonds:

Thanks so much for inviting me. I really enjoyed the conversation.