The Madness of Markets - Alex Edmans
The short version (TL;DR): Alex Edmans' The Madness of Markets argues that markets are not cold calculating machines. They are crowds of moody, copycat, story-loving humans, and the people who do well are the ones who notice. This post retells the book through its best true stories, from a football upset that erased €10 billion to a discount-shoe store dressed up as luxury, and ends with my review and one question to ask your own portfolio.
Watch first
Here is the author's own overview of the ideas.
The Final Whistle
June 2004. A European quarter-final. Greece, 150-to-1 outsiders, are playing France, the favourites and the defending champions.
The final whistle blows. Greece have won.
Football fans know what happens next: shock, silence in one country, delirium in the other. Finance professors know something else. The following week, €10 billion was wiped off the French stock market.
Nothing about French companies had changed. No factory had closed. No contract had been lost. A football match had ended, and traders were in a bad mood.
Years later, a young Alex Edmans was working at Morgan Stanley when he heard about it and wondered whether markets might be moulded by mood. His former colleagues laughed. Surely Wall Street's finest couldn't be swayed by a scoreline? So he went and collected the data: 750 games across thirty-nine countries.
The pattern was unmistakable. National stock markets tended to fall after the national team lost.
That is the first lesson of the book, and the one that undoes the rest of finance's polite fiction:
even the most rational minds fall prey to emotion.
The Genius Who Came Back for One Last Fling
If anyone should have been immune, it was Isaac Newton.
He spotted the South Sea Company early, bought in, and sold at a tidy profit. That was the clever part. Then he watched the price keep climbing, and he couldn't stay away. He came back for one last fling, right at the very top.
When the bubble burst, he lost £20,000, roughly £4 million in today's money. Newton is said to have remarked that he could calculate the motions of heavenly bodies but not the madness of people.
Three centuries later we are still doing it. In 2021, an NFT of Jack Dorsey's first tweet sold for $2.9 million. A year later its owner tried to sell it. The best bid was $280.
The Stock That Got More Attractive as It Got More Expensive
In most of life, when the price goes up, you buy less. That's Econ 101.
In 2020, Zoom's stock rose more than 700% in less than a year. The world was locked down, everyone was on video calls, and investors told themselves they were buying the next Apple. The higher the price climbed, the more attractive it looked. A rising price stopped being a cost and became a signal.
By the end of 2022, Zoom had given back almost all of it. The product was fine. The mania was not.
Here is the twist, and it's where Edmans turns from diagnosis to treatment. Because crowds overreact, a boringly simple strategy has paid off for centuries: buy what has been unloved for about three years, and be wary of what has been adored. Across data stretching from 1265 to 2017, that reversal approach delivered around 13% a year.
The catch is that it takes nerve. Buying the loser feels like standing in an empty restaurant.
Why You Always Pick the Full Restaurant
Picture two identical restaurants side by side. One is buzzing. The other is empty.
You've never eaten at either. Which do you choose?
Almost everyone picks the busy one, assuming the people inside know something. The next person sees two full tables and is even surer. Soon one place is packed and the other is dark, and the food was never the reason. Economists call it an informational cascade: each person sets aside their own hunch and follows the crowd.
Now swap the restaurant for a cryptocurrency exchange. In 2021 FTX signed up some of the most famous people in sport: Tom Brady and Gisele Bündchen, Steph Curry, Naomi Osaka, Shohei Ohtani. Each new signature made the next one easier and made staying out feel riskier. In November 2022, FTX imploded. Brady and Bündchen lost a combined $48 million, and Shaquille O'Neal later paid $1.8 million to settle a lawsuit over his endorsement.
Every celebrity was a diner sitting down in the busy restaurant. None of them had been in the kitchen.
The Meeting Held at the End of the Road
Poker players have tells. So do companies.
When Detroit-based TRW Automotive held its annual shareholder meeting in McAllen, Texas, at the southern tip of the state, about 300 miles from the nearest big city, it sent a message, even if no one said it aloud: please don't ask us questions.
Research on this pattern found that firms holding out-of-the-way meetings lagged their peers by 7% to 12% over the next six months.
Or take the CEO's private jet. Companies that disclosed such perks underperformed by about 4% a year. A $50,000 flight, a $300 million problem.
Edmans' advice is to read the people as carefully as the numbers: whispers on page 87 often speak louder than the CEO on CNBC.
The Employer That Costco Wouldn't Cut
Now a story with a happy ending, and one that most spreadsheets miss.
Costco's staff turnover is about 8% a year, against a retail average near 60%. Replacing a worker costs roughly twice their salary once you count hiring, training and lost experience. Generous pay looks like a cost. It is actually an asset that doesn't appear on the balance sheet.
The result: between its IPO in 1985 and 2025, Costco's stock rose 774-fold. The S&P 500 rose about eighty-fold. Treating employees well was, in Edmans' words, not soft-hearted socialism but steely-spined capitalism.
The lesson for investors is that the market's blind spot is whatever it can't count. Factories are easy to value. Trust is not.
And the Mistake Nobody Writes Headlines About
All of these are mistakes of doing: buying the peak, following the herd. The quieter mistake is not doing.
A dollar put into the US stock market in 1900 would be worth about $125,000 by 2025. The same dollar in Treasury bills would be worth $69. Cash isn't a loss. It's just, as the book puts it, a very expensive kind of safety.
What the Stories Add Up To
Look back at the cast: a football crowd, a genius, a video-call boom, a restaurant queue, a Texan hotel ballroom, a warehouse chain. None of them were fooled by missing data. All of them were fooled by being human.
That is the book's real argument. Today's machines read earnings reports in milliseconds and satellite photos of car parks. Your edge isn't more information. It's emotional discipline, a long time horizon, and the willingness to think differently from the room.
Edmans closes with an exercise I'd like you to try.
Imagine your whole portfolio has just been converted to cash. You are starting from a blank sheet. Based on your goals and the fundamentals, where would you put the money today, without peeking at what you used to own?
How many of your current holdings would you have the courage to buy back?
So, what did I think of the book?
Rating: 5 out of 5.
What works: the stories. Almost every idea arrives attached to something you can retell at dinner, such as the 2004 upset, Newton's last fling or the two restaurants, and the research is strong enough that it never feels like trivia. The ending is practical, too. The book moves from "here is how markets go mad" to "here is what to do about it", with ideas on rebalancing, diversification and planning your withdrawals.
A book with this many strategies tempts you to try them several, and the author is the first to warn that edges fade once everyone piles in. Treat the numbers as evidence about human behaviour, not a promised return.
I think you will like the book if you prefer finance explained through people stories rather than formulas...
Bonus Quiz: https://www.sebastianantony.com/the-madness-of-markets-quiz/
Everything above is drawn from Alex Edmans' The Madness of Markets: Why Smart Investors Make Crazy Decisions, and How to Exploit Them. This post is a book review, not investment advice.