In this episode of The Brainy Business podcast, Melina Palmer welcomes Alex Edmans, author of May Contain Lies, to discuss the fascinating intersection of finance, behavioral economics, and misinformation. Alex, a professor of finance at London Business School with a Ph.D. from MIT, delves into the impact of emotions on the stock market, using intriguing examples from his research, including the emotional effects of international sports results on stock market behavior. 

Throughout the conversation, Alex and Melina explore the broader implications of emotional influences on decision-making in both personal finance and business contexts. They discuss the dangers of confirmation bias and black-and-white thinking, and Alex offers practical steps to overcome these biases. He also introduces his concept of the "ladder of misinference," illustrating how statements, facts, data, and evidence can be misinterpreted or misrepresented, leading to misleading conclusions.

In this episode:

• Understanding the emotional impact of sports results on the stock market.
• The broader implications of emotional influences on decision-making.
• The dangers of confirmation bias and black-and-white thinking.
• Practical steps to overcome biases and make informed decisions.
• The "ladder of misinference" and avoiding missteps in interpreting data.

Show Notes:

00:00:00 - Introduction
Melina introduces Alex Edmans, author of May Contain Lies, and outlines the episode's focus on emotions, decision-making, and misinformation.

00:01:45 - Alex's Background
Alex shares his background in finance and behavioral economics, emphasizing his passion for conveying academic insights to a general audience.

00:06:10 - Dissertation Research
Alex discusses his dissertation on the impact of emotions, particularly sports results, on the stock market, highlighting the significant emotional effects on trading behavior.

00:12:55 - Broader Implications
Melina and Alex explore the broader implications of emotional influences on decision-making in personal finance and business, emphasizing the importance of acknowledging and managing emotions.

00:19:15 - Confirmation Bias
Alex explains confirmation bias and its impact on how people respond to evidence and data, using examples from sustainable investing and other fields.

00:26:30 - Black-and-White Thinking
Alex introduces black-and-white thinking as a twin bias to confirmation bias, illustrating how extreme viewpoints can overshadow nuanced understanding.

00:34:45 - Ladder of Misinference
Alex outlines the "ladder of misinference," explaining how statements, facts, data, and evidence can be misinterpreted, leading to misleading conclusions.

00:43:10 - Practical Tips for Individuals
Alex offers practical tips for individuals to overcome biases, including imagining the opposite result to challenge confirmation bias.

00:46:00 - Conclusion
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Get the Books Mentioned on (or related to) this Episode:

• Foolproof, by Sander van der Linden
• May Contain Lies, by Alex Edmans
• How Minds Change, by David McRaney
• Decisions Over Decimals, by Christopher Frank, Paul Magnone and Oded Netzer
• What Your Employees Need and Can't Tell You, by Melina Palmer

Top Recommended Next Episode: Confirmation Bias (ep 260)

Already Heard That One? Try These: 

• Sander van der Linden Interview (ep 337)
• Focusing Illusion (ep 330)
• Survivorship Bias (ep 400)
• Christian Madsbjerg Interview (ep 325)
• David McRaney Interview (ep 210)

Other Important Links: 

• Brainy Bites - Melina’s LinkedIn Newsletter
• TED: What to Trust in a “Post Truth” World
• TEDx: The Pie Growing Mindset