Prof G Markets: "Your Brain is the Worst Investor in the Room"

Guest: Scott Nations (President, Nations Indexes; author, The Anxious Investor)
Host: Ed Elson
Date: January 16, 2026

Overview

This episode dives deep into why the human brain is fundamentally ill-suited to investing, exploring common behavioral biases, investor psychology, and current market trends. Ed interviews Scott Nations, a veteran trader and author, who explains how our evolutionary wiring undermines financial decisions and how an evidence-based process can help counteract these pitfalls, especially amid volatile and rapidly changing markets in 2026.

Key Themes & Insights

1. Why the Human Brain Makes Bad Investment Decisions

• The central argument from Scott’s book, The Anxious Investor, is that the human brain has evolved for survival, not for capital markets.
• Quote:

  "The simple explanation is that investing is relatively new and evolution is not... We’ve evolved and we’ve been socialized in ways that just are not really compatible with making great investment decisions."
  (Scott Nations, 03:41)

• Our hardwired risk and loss aversion were once survival traits, but now hurt returns.

2. Behavioral Biases That Sabotage Investors

• Behavioral biases reduce investor returns by an average of 1.5% per year (per Vanguard data).
• Most harmful biases include:
  • Disposition Effect: Tendency to sell winners and hold losers.

    "The reason I say it's insidious is because it's so easy to rationalize what you're doing. ... But over time, the winners that you sell will outperform the losers that you hold."
    (Scott Nations, 05:52)

  • Herding: Copying what others are buying (e.g., meme stocks, trending tech).
  • Availability Bias: Investing in stocks that are recently in the news.
  • Fantastic Object Bias: Becoming emotionally attached to charismatic founders or stories, e.g., buying Tesla because of Elon Musk.

    "The poster child right now would be Elon Musk... If you buy a Tesla, they're a little bit closer to him, and often they feel the same thing about the stock."
    (Scott Nations, 09:46)

• Biases are not just theoretical—they are visible in everyday retail and professional trading.

3. Stories vs. Fundamentals in Markets

• Narratives have a huge impact on valuation, regardless of underlying business fundamentals.
• Quote:

  "Stories are what drive markets, stories are what drive valuation... it sounds like part of the idea of eliminating your biases is to eliminate your susceptibility to stories. But at the same time, that's the whole ballgame."
  (Ed, 11:31)

• Ultimately, "it works, until it doesn’t." Investors holding because of stories are often slow to sell, compounding losses.
  (Scott Nations, 13:57)

4. Developing a Reliable Process

• Since instincts are unreliable, experienced investors rely on a disciplined process.
• Quote:

  "Develop a process, tweak the process, and then when the process works, tweak it a little bit more, improve, but start to rely on the process."
  (Scott Nations, 15:52)

• Warren Buffett's "voting machine vs. weighing machine" analogy: stories may rule in the short-term, but fundamentals win over time.

5. Current Market Forces (2026)

• Major trends influencing 2026 include:
  • Volatility cycles: Quiet periods are followed by sharp jumps in volatility, often with no warning.

    "Volatility is heteroskedastic... it will stay low for a while and then some shock will come along and it will jump..."
    (Scott Nations, 25:14)

  • Zero-Day Options and the Gamification of Trading:
    • Surge in retail and high-frequency trading, especially with 0DTE options (59% of options volume in 2025).
    • Mirroring gambling trends and risking market stability.

    "The things that really make options a neat vehicle, they kind of break down. When you're talking about zero DTE options, it's more of a bet, it's more of a speculation... I'm not certain it's going to be good for very many people's portfolios."
    (Scott Nations, 31:57)

  • Prediction Markets: Rapid growth, institutional backing, but concerns over risk, lack of hedging purpose, and potential systemic effects.

    "It's gamification. And worries about insider trading abound now... It's a bet, it's not an investment, it's not a hedge."
    (Scott Nations, 34:24)

  • The AI Investment Thesis:
    • Potential for transformative change and (potential) bubble conditions, but current valuations not yet at 1999 extremes.

    "Are we in a bubble? I think we're in a little bit of a bubble, but this could be a bubble that we grow into. AI just has so much potential..."
    (Scott Nations, 42:45)

6. Risks: Bubbles and ‘Financial Contraptions’

• Every crash is enabled by a new financial instrument that adds leverage at the wrong time—e.g., portfolio insurance (1987), mortgage-backed securities (2008).
• Current concern: Private Credit

  "It's opaque, it's huge and it has the potential to do a little bit like what Long Term Capital did... it's sneaky dangerous..."
  (Scott Nations, 45:10)

• Other candidates like crypto and prediction markets seen as too small to trigger systemic collapse, but private credit’s scale and opacity are worrisome.

7. The Interest Rate & Inflation Dilemma for 2026

• Federal Reserve likely to cut rates for political reasons, despite economic data.
• Danger: Low rates can create unsustainable asset bubbles, elevate inflation, and misprice risk.
• Quote:

  "Rates should not be lower... The Federal Reserve has done way more damage when they keep rates too low for too long than they do when they hold rates steady or even a little bit too high."
  (Scott Nations, 49:53)

Timestamps for Notable Segments

• Why is the brain a terrible investor?
  [03:36 – 05:14]

• The most harmful investor biases
  [05:14 – 07:33]

• Fantastic Object Bias & Memestock Dynamics
  [09:07 – 11:31]

• Stories vs. Fundamentals in Markets
  [11:31 – 13:57]

• Building a better investment process
  [15:52 – 17:17]

• 2026 Market Threats: Volatility, Zero-Day Options, Prediction Markets
  [24:55 – 36:30]

• The bubble question: Is AI a “grow-into” bubble?
  [42:27 – 44:27]

• Private Credit: The Potential Trigger for Next Crisis
  [45:10 – 48:50]

• Interest Rates, Inflation, and the Fed’s Political Risk
  [49:53 – 52:14]

• Advice for Young Investors
  [53:24 – 54:13]

  "Max out your 401, max out your IRA... and don't trade it. Just leave it alone and you'll be amazed the amount of money you'll have in 10 years."
  (Scott Nations, 53:24)

Memorable Quotes

• On biases:

  "Of the 14 or 15 I talk about in the book, none of them, not a single one... makes you a better investor."
  (Scott Nations, 03:41)

• On market cycles:

  "It's easy to say, well, yeah, maybe it's crazy to buy Tesla stock because Elon is iconoclastic—but if it works, it works. The problem is that it works. Until it doesn't."
  (Scott Nations, 13:57)

• On the current risk landscape:

  "We will have some sort of ugly debacle, and stocks will probably fall 20 to 25% from their highs. And it's only then that people will learn the lesson. Oh, yeah, this does happen."
  (Scott Nations, 27:27)

• To young investors:

  "Don't think you're smarter than the market because there are a number of biases that convince people that they should be trading or their retirement money, their investment money, all the time."
  (Scott Nations, 53:24)

Key Takeaways

• The brain's evolutionary habits undermine investor discipline, privileging short-term safety over long-term gain.
• Story-driven bias, herding, and availability are especially pronounced in an age of meme stocks, charismatic founders, and social media.
• Volatility ebbs and flows; don't be lulled by periods of calm or panic into thinking they are permanent.
• Leverage and complex financial instruments pose systemic risks—today’s worries center on opaque private credit.
• The AI narrative could be either the next bubble or a growth opportunity, but caution and skepticism remain warranted.
• Young and long-term investors should rely on systematic processes and avoid performance-chasing or market timing.

Final Thoughts

Scott Nations offers a pragmatic, sometimes cautionary perspective on the intersection of psychology and markets, emphasizing the need for humility, process, and awareness of our mental blind spots. As 2026’s market forces unfold—with volatility, rapid retail participation, and AI-driven hype—the time-tested principles of diversification, discipline, and skepticism stand firm.

For further insights, read Scott Nations' books:

• The Anxious Investor
• A History of the United States in Five Crashes

Produced by Vox Media Podcast Network.