Episode summary
The List Is Public. It Still Outperformed For 28 Years | Alex Edmans on What Markets Don't Measure
Excess Returns
· · 1 hr 7 min · Hosts: Kai Wu · Guests: Alex Edmans
Summary
Alex Edmans argues that markets are not fully rational and efficient because emotions, attention, and institutional biases can push investors to overreact to headlines and underreact to slower-moving fundamentals. He uses the example of traders reacting to a soccer result to show that sentiment can move prices, and he contrasts short-term momentum with long-term reversals to explain how both underreaction and overreaction can coexist.
A major theme is that intangible assets are often economically important but hard for markets to see and hard for analysts to translate into valuation. Edmans highlights employee satisfaction through Costco, where companies with high worker satisfaction outperformed peers over 28 years, and extends the case to innovation, patents, brands, customer reviews, and talent flows. He argues that even when information is public, it can persist as an opportunity because investors either dismiss it, mismeasure it, or struggle to convert it into a valuation input.
He also says value investing should be updated rather than abandoned: traditional book-value screens miss much of a company’s real asset base, so incorporating intangibles can improve the signal. On ESG, he argues the label is too broad and politicized; some ESG factors such as employee satisfaction are financially material, while others are not, and some important value drivers like innovation sit outside ESG entirely. His broader point is that investing edges persist where human psychology, patience, and harder-to-measure fundamentals still matter.
Key takeaways
- Edmans says market prices can move on emotion as well as fundamentals, so behavioral biases are a real source of mispricing.
- He argues employee satisfaction can be a persistent alpha source because it is both economically meaningful and difficult for markets to process.
- He says innovation, patents, brand strength, customer reviews, and talent flows are all investable intangibles that can improve valuation models.
- Edmans argues value investing still works if it measures a company’s full intangible asset base rather than just book value.
- He says ESG is not a single investing factor; only some ESG issues are financially material, while others are either immaterial or even negatively related to returns.
Notable quotes
“markets are affected by emotions not just fundamentals”
“in the short term the market underreacts and in the long term the market overreacts”
“intangles of being so compelling. Even if you had the information and it's reliable, its valuation implications are not as clear-cut”
“companies with high employee satisfaction, defined by being featured in the 100 best companies to work for in America, delivered shareholder returns that beat their peers by 2.3 to 3.8% per year”
“ESG is extremely important and nothing special”
How the episode opens
Hi everyone, welcome to the tangible economy. Our guest today is Alex Edmunds, professor of finance at London Business School and a leading thinker on behavioral finance, responsible business, and the drivers of long-term corporate value. Alex's research on employee satisfaction provided some of the earliest evidence that a company's most important assets might not appear appear on its balance sheet and that markets can be surprisingly slow to recognize their value.
He is also the author of Grow the Pie and May contain lies and a co-author of principles of corporate finance. His new book, The Madness of Markets: Why Smart Investors Make Crazy Decisions and How to Exploit Them, examines why markets overreact, underreact, and sometimes react to entirely the wrong things. Alex, thanks for joining me and welcome to the intangible economy.
Well, thanks so much for having me, Kai. It's really great to be here. So your book opens with you on the Morgan Stanley trading floor in 2004 watching 10 billion euros fly off the French market after a football defeat. Uh what did you see um and you know what your PhD was was not teaching you? Um what did this experience kind of like set you off on an interesting path? What was that?
So this showed me that markets are affected by emotions not just fundamentals. So as you say, I was doing my PhD at MIT and MIT being MIT argued that markets were ration rational and dispassionate and efficient. They're driven by quantitative factors.
So people will look at profits and dividends and sales growth and will incorporate them in an unbiased manner. And if that's true, then it should absolutely be true on the Morgan Stanley trading floor because here are some of the most sophisticated investors who should be able to make the best decisions because billions of dollars were at stake.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- behavioral finance
- market overreaction and underreaction
- intangible asset investing
- innovation through r&d and patents
- esg and inclusion metrics
Companies and tickers mentioned
- COST
- AMZN
- Costco
- Amazon
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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