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

What are spiders doing inside your home? You’ve probably spotted a few crawling around, especially in the fall. But contrary to what you might assume, many of those spiders didn’t just wander in from outdoors. And there’s a very specific reason you suddenly start seeing more of them this time of year — it has a lot to do with romance. https://www.burkemuseum.org/collections-and-research/biology/arachnology-and-entomology/spider-myths/myth-spiders-come-indoors Should you say something — or just keep your mouth shut? It’s a dilemma we face all the time. Do you tell someone they have something stuck in their teeth? Should you ask a stranger who is crying if they’re okay? What about telling a friend what you really think about the person they’re dating? It turns out we’re surprisingly bad at predicting how people will react when we speak up — or how they’ll feel when we don’t. Vanessa Bohns joins me with fascinating research that can help you handle these awkward everyday moments much better. She is a social psychologist and professor of organizational behavior at Cornell University and author of Should I Say Something?: The Science of What to Share—and What to Keep to Yourself (https://link.amazon/B03B4LfqD). We like to think investing is about numbers, facts and rational decisions. Yet stock prices and investor behavior can be influenced by things that seemingly have nothing to do with money — including the weather, politics and even the outcome of a sporting event. Why do otherwise intelligent investors make such irrational decisions, and can understanding those quirks actually give you an advantage? Alex Edmans explains the fascinating psychology that drives financial markets and how recognizing it can help you make smarter decisions. Alex is a professor of finance at London Business School and a leading expert on behavioral finance. He is author of The Madness of Markets: Why Smart Investors Make Crazy Decisions—and How to Exploit Them (https://link.amazon/B0eq2D3g9). Come autumn, pumpkins are everywhere. We carve them, decorate our homes with them and, of course, eat plenty of pumpkin-flavored foods. But the pumpkin you scoop out of a can looks nothing like the inside of that big orange pumpkin sitting on your porch. So what exactly is in canned pumpkin — and why is it so different? The answer may change the way you look at pumpkin pie. https://www.allrecipes.com/what-is-canned-pumpkin-11747656 PLEASE SUPPORT OUR SPONSORS MONARCH: Write your own money story with Monarch! Use promo code SYSK at ⁠⁠⁠⁠⁠https://Monarch.com⁠⁠⁠⁠⁠ to get your 1st year of Monarch Core half off at just $50 AIRDOCTOR: Head to https://AirDoctorPro.com and use promo code SYSK to get up to $300 off ANY of their select AirDoctor models, plus you will get a 3-year warranty, absolutely FREE! with a 30-day money back guarantee. TREES. COM: Right now, ⁠⁠⁠⁠⁠https://Trees.com ⁠⁠⁠⁠⁠have great deals on planting essentials, up to half off on select plants. And listeners to our show get 20% OFF their purchase when using the promo code SYSK at checkout. KA'CHAVA: Ka’Chava’s new Salted Caramel is the perfect balance of mouthwatering flavor and benefits. Embrace your salty side. Go to ⁠⁠⁠https://kachava.com⁠⁠⁠ and use promo code SYSK to get 15% off your first order! VINTED: Ready to clean out your closet and make some extra money? Download the Vinted app for free and start listing! With no seller fees, you keep every dollar you earn and for a limited time, enjoy free shipping in the US on Vinted. QUINCE: Find your next Fall favorites at Quince! Go to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://Quince.com/sysk⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ for free shipping on your order and 365-day returns. Now available in Canada, too! PLANET VISIONARIES: In partnership with The Rolex Perpetual Planet Initiative, this is Planet Visionaries. Listen or watch wherever you get your podcasts! Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Mike Carruthers?

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• 0:44Mike Carruthers?

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• 1:22Mike Carruthers?

  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?

• 1:36Speaker 01

  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?

• 1:51Mike Carruthers?

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

• 2:00Speaker 02

  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.

• 2:17Mike Carruthers?

  All this today on Something You Should Know. There's probably no better endorsement for a company than this. I keep buying their stuff. That's exactly what's happening with me and Quince. It started with their clothes. I've bought sweaters, polos, pants, jeans, shoes, a belt. And Quince has become one of the first places I look when I need something new to wear. And my wife and son buy from Quince too, all the time. What keeps bringing us back is the quality and the price. Quince uses premium materials like 100% Mongolian cashmere, organic cotton, merino wool.

• 3:00Mike Carruthers?

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• 3:42Mike Carruthers?

  Get free shipping on your order and 365 day returns. Now available in Canada and the UK too. And when Quince asks where you heard about them, please let them know it was Something You Should Know. It's the best way to support our show.

• 3:58Speaker 03

  Something You Should Know. Fascinating intel, the world's top experts, and practical advice you can use in your life. Today, Something You Should Know with Mike Carruthers.

• 4:11Mike 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.

• 4:52Mike Carruthers?

  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.

• 5:33Mike Carruthers?

  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,

• 6:18Mike Carruthers?

  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.

• 6:33Speaker 01

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

• 6:36Mike Carruthers?

  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?

• 6:48Speaker 01

  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.

• 7:30Speaker 01

  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 we might say something we shouldn't have and put our foot in our mouths and end up accidentally pushing people away, which is the exact opposite of what we want.

• 8:15Speaker 01

  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.

• 8:30Mike Carruthers?

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

• 8:35Speaker 01

  Yes, your guess is correct. And 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 going to 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

• 9:18Speaker 01

  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

• 10:02Speaker 01

  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 four 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.

• 10:39Mike Carruthers?

  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.

• 10:59Speaker 01

  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, you know, 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 two sort of situations. One, despite this subpar interview, this person gets the job, and they come in and

• 11:43Speaker 01

  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.

• 12:28Mike Carruthers?

  Well, as you said, though, that there are times when it doesn't really help the other person, but what about, 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?

• 12:49Speaker 01

  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 three 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, you know, personal struggles, or even successes, because we worry we'll come across negatively or as bragging, and we could talk more about that.

• 13:34Speaker 01

  And then, the third thing is, what will saying something achieve? Right? What is my actual goal in this situation? And in this case, you could imagine two sort of competing goals, and say, you know, "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. Or you could say, "I really just don't want to 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

• 14:17Speaker 01

  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.

• 14:43Mike Carruthers?

  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, "Ah, 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.

• 15:05Speaker 01

  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, you know, things that either they were doing wrong, you know, 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?"

• 15:48Speaker 01

  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, "Would I want someone to tell me if I was in this situation?", is a great way to figure out whether you should say something.

• 16:26Mike Carruthers?

  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. A big thank you to today's sponsor, Vinted. I think most of us have what I call "someday clothes." "I'll wear that someday, that'll fit better someday, someday I'll have a place to wear that." Meanwhile, it's been hanging in the closet for three years. Vinted offers another possibility: Sell it.

• 17:08Mike Carruthers?

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• 17:53Mike Carruthers?

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• 18:03Speaker 04

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• 18:31Mike Carruthers?

  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.

• 19:15Mike Carruthers?

  I mean, what do you say?

• 19:17Speaker 01

  Yeah, that's a great question. And I think there as well, you know, it comes down to a few different considerations. It's 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 unbotox 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

• 19:59Speaker 01

  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 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.

• 20:40Speaker 01

  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.

• 20:50Mike Carruthers?

  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, 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?

• 21:16Speaker 01

  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 twenties 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.

• 22:00Speaker 01

  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 two things that happen when you decide to say something or not say something. You're communicating two 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, 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?

• 22:45Speaker 01

  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.

• 23:27Speaker 01

  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.

• 24:01Mike Carruthers?

  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, 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, as you just said, that's not the point. It's really not the point. It's really to just connect as another human being and say, I noticed 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 it is that's upsetting the person, but it's, it is something.

• 24:41Speaker 01

  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, in your, 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.

• 25:25Mike Carruthers?

  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, it's about the turning the attention towards and showing some concern that that's what hits home.

• 25:47Speaker 01

  That's exactly right. And you know, the, it's the same for saying something positive, like 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.

• 26:32Speaker 01

  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.

• 26:54Mike Carruthers?

  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?

• 27:05Speaker 01

  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? 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.

• 27:48Speaker 01

  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.

• 28:06Mike Carruthers?

  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.

• 28:35Speaker 01

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

• 28:38Speaker 04

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• 29:42Mike Carruthers?

  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?

• 30:24Mike Carruthers?

  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.

• 30:52Speaker 02

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

• 30:55Mike Carruthers?

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

• 31:00Speaker 02

  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 call 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.

• 31:44Speaker 02

  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 shifts.

• 32:21Mike Carruthers?

  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?

• 32:36Speaker 02

  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 three years, you call them the losers.

• 33:20Speaker 02

  The ones that did well over the last three years, you call them the winners. If you buy the losers and sell the winners and then hold them for another three years, you get reversal, pass losers, then become winners and pass 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.

• 34:06Speaker 02

  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.

• 34:50Speaker 02

  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 the longer runway.

• 35:14Mike Carruthers?

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

• 35:25Speaker 02

  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

• 36:09Speaker 02

  and allow one of those powerful forces in economics, which is compounding, to take hold.

• 36:15Mike Carruthers?

  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.

• 36:27Speaker 02

  Correct. And this might seem a 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 invigil 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,

• 37:11Speaker 02

  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 cost. So you'd have been better off doing nothing.

• 37:50Speaker 02

  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.

• 38:04Mike Carruthers?

  The scorecard on people picking individual stocks, including experienced money managers, is that they tend to not beat the market, that 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.

• 38:40Mike Carruthers?

  But there aren't a lot of people that are legends in picking individual stocks.

• 38:45Speaker 02

  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.

• 39:25Speaker 02

  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 a 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.

• 40:11Speaker 02

  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 are 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.

• 40:46Mike Carruthers?

  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.

• 41:15Speaker 02

  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

• 41:59Speaker 02

  on the best way to address our heart condition.

• 42:02Mike Carruthers?

  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?

• 42:29Speaker 02

  This is really interesting. So take a catastrophic event like a plane crash. If the market goes down afterwards, it could be for two 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,

• 43:13Speaker 02

  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, that's half a percent a lot, but that is about $17 billion wiped off the UK market on a single day.

• 43:54Speaker 02

  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,

• 44:37Speaker 02

  particularly if they were alarms 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, like a money manager, we are affected by our emotions and these are things which will feed through to decisions, including trading ones.

• 44:55Mike Carruthers?

  I just can't understand that, 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.

• 45:09Speaker 02

  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 of your 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?

• 45:50Speaker 02

  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.

• 46:15Mike Carruthers?

  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?

• 46:28Speaker 02

  Yes, so there are some broad patterns which evidence suggests work on average. However, they will not work in every particular situation. 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 three-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 three years. However, interestingly, if we were to do something similar, but over a different time scale, you would get the opposite result. What do I mean by this?

• 47:10Speaker 02

  Let's say we instead saw winners and losers on the basis of the past six-month performance, not the past three 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.

• 47:51Speaker 02

  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 momentum will persist for the next six months.

• 48:06Mike Carruthers?

  So there are a lot of professional money managers. And from what I understand, and you would know best, but 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?

• 48:26Speaker 02

  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 should be going on here. Firstly, it may be that their own clients don't realise 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.

• 49:10Speaker 02

  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 realise 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 six 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.

• 49:53Mike Carruthers?

  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 behavioural 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.

• 50:23Speaker 02

  Appreciate it.

• 50:27Mike Carruthers?

  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 flavourful. 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, flavourful flesh that makes good pumpkin puree.

• 51:10Mike Carruthers?

  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 five-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 Micah Rathers, thanks for listening today to Something You Should Know.

• 51:51Speaker 04

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• 52:22Speaker 06

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