Prof G Markets – Episode Summary
Markets Are Ignoring Catastrophic Risks — ft. Aswath Damodaran
February 20, 2026 | Vox Media Podcast Network

Overview:
In this episode, hosts Scott Galloway and Ed Elson welcome back renowned NYU Stern finance professor Aswath Damodaran for a deep discussion on why markets are currently ignoring the significant, escalating risks facing the global economic order. The conversation focuses on equity market valuations, the underpricing of catastrophic risks, the impact of AI on software stocks, the changing nature of investment vehicles, and how individual investors should navigate a climate increasingly defined by uncertainty. The episode is rich with real-world examples, candid insights, and engaging banter among the hosts and their guest.

Key Discussion Points & Insights

1. Equity Valuations and Underappreciated Catastrophic Risk

   • [07:55] Damodaran reiterates his concern that while S&P 500 levels remain steady, markets are ignoring "the potential for catastrophic changes... greater now than perhaps at any time in the last 70 years."
   • He attributes this risk to the unraveling of the post-World War II economic order centered on the US and the dollar, with no clear successor system in sight.
   • Markets are "blowing by" these changes, relying on resilience shown during events like Covid but underestimating the pitfalls and corrections likely to arise.
   • Quote: "If you do bring in catastrophic risk, then the market becomes worrisome across the board... there seems to be too much acceptance that we’ll figure a way through this without serious pain." (Damodaran, [09:37])

2. Global Order and U.S. vs. International Risk

   • [10:23] The potential collapse/reconfiguration of the global economic order is not just a U.S. problem; Europe and the broader world benefited from U.S.-led structures is likely to feel the pain as well.
   • The transition from U.S. dollar dominance is seen as particularly fraught because no viable alternative yet exists.
   • Damodaran sees this as a period of adjustment, not of immediate collapse, with corrections anywhere from 10% to 25% possible as the new order is established.
   • Quote: "It’s not so much a collapse, but there's got to be a new economic order that comes out of this." (Damodaran, [11:21])

3. Markets’ Response: Rotation, Capital Flows, and Limits on Diversification

   • [12:07] Ed and Damodaran discuss the common investor response—to rotate out of U.S. equities into international markets—but Damodaran counters that many of the best-positioned companies amid business transformation (like AI) are American.
   • Even with capital flows leaving the U.S., dollar weakness has outsized effect, making performance of foreign markets seem better in dollar terms.
   • Quote: "There are limits to how much you can move out of the US without ending up being underinvested in businesses that are best positioned..." (Damodaran, [14:25])

4. AI Disruption and Software Stock Selloff

   • [13:23, 16:20] Recent sharp declines in iconic software companies (down 25–40%) are discussed. Ed and Scott propose it might be a buying opportunity.
   • Damodaran notes software companies are "ripe for disruption" due to "fat" margins but agrees that services like Salesforce and Oracle are sticky—with deep integration into customer operations.
   • Quote: "The adaptable companies in this mix will be the ones that make it... You're looking to see how they're incorporating AI into their product mix." (Damodaran, [19:53])
   • He advises investors to look for companies visibly cutting costs and adapting fast to AI-driven margin pressures, rather than buying the sector wholesale.
   • Quote: "Rather than buy an entire software basket, I would look at a subset... where you're looking at adaptability." (Damodaran, [24:19])

5. Private AI Companies (Anthropic, OpenAI) and Investment Implications

   • [28:11] Scott & Ed ask Damodaran about Anthropic and OpenAI’s sky-high private valuations, noting that the disruption in public software markets is not mirrored by corresponding gains in public stocks—since the AI disruptors themselves are private.
   • Damodaran prefers Anthropic over OpenAI given the egos at play, and doubts existing public valuations are justified.
   • Highlights a structural challenge for public equity investors: “The index has to reflect that loss, but it won’t reflect the gain.” (Damodaran, [32:54])

6. Navigating Uncertainty: Tactics for Investors

   • [33:46–35:01] Ed raises the issue of whether moments of widespread fear and confusion—such as the current software stock rout—are buy signals.
   • Damodaran counters that one can “have your cake and eat it too” by hedging index risk (for example, buying software but shorting S&P), though this reduces upside and is costly.
   • He summarizes human responses to uncertainty: denial, reliance on old mental shortcuts, outsourcing to experts (or “crowdsourcing” now), and prayer. But stresses the importance of systematic, research-driven investing in such periods.

7. Signals of Rising Catastrophic Risk: Gold, Silver & Political Cracks

   • [39:21] Damodaran notes gold and silver’s exceptionally strong year despite the absence of hyperinflation or deep market crises as a sign that level-headed investors are unusually risk-averse.
   • Emphasizes listening not to “doomsayers” but to typically rational voices raising alarms.
   • Recommends tracking measures like catastrophic insurance, high-yield bond spreads, and crowdsourced indicators.

8. Efficient Markets vs. Madness of Crowds, and the Rise of Prediction Markets

   • [47:33] Discussion of Kalshi and Polymarket. Damodaran says prediction (betting) markets aggregate information rapidly and effectively—sometimes outdoing pollsters and analysts—and thus are a useful barometer for investors.
   • On passive investing: Passive vehicles (ETFs, indexing) now account for over 50% of market assets, a historic shift.
   • Damodaran highlights the paradox: faith in market efficiency must be balanced with awareness that crowds can go mad and create exploitable mispricings—but recognizing and acting on those moments is psychologically hard.

9. Persistent Risks Beyond “the Trump Effect”

   • [57:44] Ed asks whether the current risk environment is just a Trump-era phenomenon. Damodaran argues that issues like eroding Fed independence and globalization backlash predated Trump and will outlast him.
   • Quote: "His going away is not gonna make them go away either. There are underlying political and economic forces that came in before he became president, will continue after he leaves." (Damodaran, [58:10])

10. Higher Education: Still Ripe for Disruption... But Not Yet Disrupted

    • [61:02] Scott calls out higher education as a classic example of a high-margin, unadaptive sector. Damodaran blames price-fixing, government loan support, and slow-moving cultural shifts for forestalling disruption, though notes MBA and grad programs are starting to see pressure.

11. Outlook for 2026

    • [66:57] Damodaran sees 2026 as likely a “flat or normal year”—with the real economy improving but markets underperforming expectations.
    • Quote: "This is a year where the economy is going to do better than we expected, but markets are going to do worse than people think." (Damodaran, [67:23])

Notable Quotes & Memorable Moments

• "The potential for catastrophic changes is much greater now than perhaps at any time in the last 70 years.” – Aswath Damodaran [08:24]
• "It's not so much a collapse, but there's got to be a new economic order that comes out of this." – Damodaran [11:21]
• “I agree with you that the Salesforces of the world and the Oracles are much more sticky businesses than we let on. So if you look at them, the software is only a small piece of the puzzle... once they get adopted, they squirrel their way, if that's the right word, into your systems.” – Damodaran [18:19]
• “Rather than buy an entire software basket, I would look at a subset of software companies where you're looking at adaptability.” – Damodaran [24:19]
• “Private AI disruptors like Anthropic and OpenAI have sucked value out of public software, but that value can’t be captured by public index investors.” – Paraphrased from Damodaran [32:54]
• “Investing is all about faith and your faith will be tested. Might as well be open and honest about the fact... This is not a space where you can be absolutely sure about anything.” – Damodaran [36:48]
• “The dollar is wobbly. But I can't think of an obvious replacement for it.” – Damodaran [45:43]
• “Markets can sometimes do strange things up in the mood at the moment. And I think that tension continues. So even when you believe in efficient markets, you have to accept the fact that markets can make humongous mistakes.” – Damodaran [54:38]

Timestamps for Key Segments

• 07:55 – Damodaran on S&P 500, equity risk premiums & today's biggest danger
• 10:23 – Global order, US vs. international impact, the pain of transition
• 13:23 – Software sector selloff & the dynamics of business transformation
• 16:20 – Sticky moats in software; are there bargains?
• 19:53 – Adapting to AI, what investors should look for in software stocks
• 24:19 – How to filter for adaptable companies
• 28:11 – Anthropic & OpenAI: Private valuations vs. public markets
• 32:54 – Value migration from software to private AI, and what it means for investors
• 39:21 – Gold, silver as signals for hidden systemic anxiety
• 47:33 – Prediction markets, Kalshi, Polymarket, and crowdsourcing risk
• 54:38 – Efficient markets, wisdom vs. madness of crowds
• 57:44 – Trump, the persistence of systemic/political risks
• 61:02 – Higher education as an undisturbed “disrupted” sector
• 66:57 – Damodaran’s 2026 market outlook: “flat or normal year”

In Summary
This episode delivers a thoughtful, at times sobering examination of how global markets are currently priced for optimism, not for the significant systemic and political risks that have quietly been gathering steam. Damodaran provides guardrails for investors: look for adaptability, price in risk, and acknowledge that neither experts nor crowds are infallible, but good systems and humility will be your best defenses. The conversation is wide-ranging—touching on software, AI, prediction markets, gold, the dollar, and even higher ed—but always returns to the core issue: Are we ignoring risk, and if so, how do we play defense?

For a deeper understanding or to revisit the full conversation, refer to the key timestamps above for each significant topic.