Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

and I'm Joe Weisenthal. Joe It's a big month for us.

It's a big month for us. We've been doing this for ten years.

I know, I can't believe it. Do you remember the first episode?

Yeah. Of course, with, Tom Keene. Yeah. And then our second episode, I think, was about bananas. For some reason, it was. You're right.

It took us a long time, to figure out what we were doing. It took us a long time to figure out what we were doing, and I don't think I would have that point. I would have expected that we'd be doing it ten years.

I don't know. I was expecting, I think, turning on a microphone in a radio studio and talking for a while. Oh, we started doing it because we wanted to have a podcast and talk to interesting people. I think we were hashtag blessed that no one was listening for a very, very long time, which gave us a long runway to figure things out. So we got lucky.

That said, you know, ten years. It is, in fact, a long time to be doing this. And a lot has changed in that period. A lot has changed in that period. Sometimes mind blowing. And it really, you know, I feel like and we've talked about this before for sure, but the thing that we were covering is capital and news at the time are now capital H history. And it's like these things that are we sort of take for granted. Everyone was there was like no children. Let us tell you what it was like in the old days when, you know, people were worried the world was going to come to an end because, you know, Greece is sovereign debt and all this stuff that we just sort of part of the landscape, but people don't remember it.

No, one of those things has to be the idea of value or fundamental investing, right? Like, let us tell you about the days when price actually mattered. Letters had a limit to what investors would pile into.

Yeah, that's exactly right. Let us talk about the days when people used to talk about PE ratios. This stock oh it's at a 20 5BE. We better sell it and buy the stock at two £0.15 or whatever. Yes, that feels quaint. Maybe it'll be back there one day. But for now, given how many things in the market seem to be, some of these, the Grandma and Dodd kind of stuff, it feels a little old. A little old fashioned.

Little old fashioned. Yeah. Okay. So one of the big themes that has emerged in the ten years that we've been doing this podcast is, everyone seems to have grown more stupid.

I would say, hopefully that's not related. It's not like a correlation thing.

It, it could be all right. But, you know, we have all this gamification of investing, people betting on lines going up. Yeah. Or down, people betting on random meme coins, things like that. And I think, you know, we talk about it a lot on the podcast, but this is actually a fundamental shift in the market. If you think about the market as something that's supposed to be about capital allocation. Yeah, alignment of incentives. People are investing in something because they think it's going to be profitable in the future at the right price. And now people are just sort of piling into stuff because other people are doing it.

And again, line go up deep down, I still believe that the value of a stock should reflect the net present value. I know you're an MH guy, but I've, it's been a little bit hard with, some of these things and, you know, the other thing too, that is sort of change is that like half of our episodes these days are kind of AI related in some way. And so I think there's a lot of interesting stuff going on, particularly at the intersection of tech and applying tech to both investing in tech, but then the application of tech to investing and so forth.

So, yes, much has changed, a lot has changed. And we have the perfect guest to talk about how everyone has grown more stupid over time. We're going to be speaking with someone we've wanted on the show for a really, really long time. I'm very excited about this. It's Cliff Asness the co-founder and CIO of AQR. Thank you so much for coming on. All thoughts.

Thank you for having me.

What's it like to be a rational person living in an irrational world class? Yeah, you've been doing it for a long time.

Well, a rational person is not always how I'm described, but there's rational investing, and then there's rational conduct in your personal life. So let's just distinguish those, you guys in your intro said like, it's a little it's a little scary for the next hour because you said like a third of the things I want to say.

I wrote a rather, you know, gigantic piece in the Journal of Portfolio Management. They were having a 50th anniversary. None of us were quite old enough to have been there in the first issue, but they were looking for the old guys to write kind of retrospectives. And the piece I wrote was called The Less Efficient Market Hypothesis. And now I think you guys probably know this, but my dissertation advisor was, a little known guy named Eugene Fama we've heard of, I was his Ta for two years. I grew up in MH. I love that you guys should say MH and your audience knows. Yeah, what you're talking about. That is not the norm for me. When I, when I, when I talk about these things,

I was not a perfect, efficient marketer even back then. Neither is Gene, by the way. Gene, Gene's not a zealot. Yeah, well, he about third week of class. I know that's because I took the class three times I didn't fail, but as the ta, I sat through it, three full years. And like, the third week, he always tells the class markets are almost certainly not perfectly efficient because genes are brilliant guy and recognizes that perfection is a really stupid idea. He's been on the show, by the way. Oh, I didn't okay. Yeah, yeah. And I don't know if that came up, but he's always very honest about that. He probably thinks they're considerably more efficient than I do these days. And I think I probably think it's they're more efficient than then maybe the active average retail trader.

But I wrote a dissertation for him on the success of price momentum. That is not a very gene Fama dissertation. A gene Fama dissertation is I've studied price momentum and it loses gobs of money. And these idiots on Wall Street do it anyway. That's kind of a fishing market. Look how silly they are. And he was great about it. I remember I kind of mumbled, I'm like, I want to write a dissertation on price momentum. And by the way, I. I find it works very well. What was that? Cliff? It works very well. What was that? Cliff? It works very well. And he said, if it's in the data, write the paper.

So, I've drifted at least a little bit further from efficient markets, even way back then, now price momentum. I'll do a lot of Segways. You're going to have to stop. No, that's great. That's fine. I do parenthetical within parenthetical price. Momentum is often thought of as this index of irrationality. It can work for two different reasons. It can work because of yes, feedback loops. Chasing line goes up, just like you said before, and people pour in, which isn't very connected to reality. It's just chasing returns. But it can also work, because of what the behavioral finance people would call under reaction. News comes out that should move the price by so and so. On average, we have found they say we it's the royal we of academia and private researchers that the price moves in the right direction but doesn't move all the way. So if you trade on that, there's still a little bit to go.

But here's here's what I observed in the very beginning of acre AQR launched in 1998 after we had a fabulous run at Goldman Sachs. Is this survivorship bias? And this you don't get to start your own billion dollar hedge fund unless you have a fabulous run at Goldman Sachs or something. Equivalent. We had a good first month. You know, the story is going to go and you say you had a good first month, right? And then that first month, by the way, was August of of 1998, when the S&P was down 20% on the Russian debt crisis. And we're doing high fives, like we say, we're market neutral and we're up a little bit in a crash. And it was my first of many lessons, never too high, five in this business, when you fully retire and divest, you get one high five now.

But the next 18 months was the crescendo of the famous dot.com or tech bubble. And that was not kind to us. It was particularly not kind because we decided to start with a extremely aggressive, market neutral fund. So momentum helped, as you can imagine, in a bubble. But value was just destroyed and that was most of the model back then.

We hit spreads between cheap and expensive. This is something we invented at the time, and now a lot of people do. No one had people said short stocks on valuations go long, the cheap, short the expensive. But the very obvious question of how cheap and how expensive are they? Sometimes pretty tightly clustered, sometimes wider. Does that mean they're better or worse going forward? Was not asked before. So we invented this measure, and the spread between cheap and expensive for 50 years had looked like a well behaved series. It moved around a fair amount, but. And then I'm drawing on my hand if you see the video. Oh yeah. Oh yeah. We should mention this is an audio medium. So and then in late 99, 2000 and went to just way wider than anything ever seen for 50 plus years. We also showed that historically those were better times. You never saw that before, but when it was wider were better times for value. We stuck with it. We made money. Round trip. Life was good

if you would ask me after the round trip, which was harrowing. You know, even if we love our process, you never want to start a business with poor returns, if you ask me. At the end of that, which was probably a couple years later, 2003, do you think you're ever going to see that in your career again? I think I would, I think don't want to ask, thank God, because I think I would have gotten it wrong, but but I think I would have said, oh, probably not. Hopefully. I wouldn't say definitely no one who does what any of us do for a living, I should say definitely. That's a bad word. In markets, 40% is the favored term, right? There's always a 40% chance there's all, but hey, it was the craziest thing numerically in 50 plus years. Be the question presupposes it's built in that I and people of my cohort will still be around. Yeah, right. And we'll probably be closer to in charge. So how's it going to happen again? And then it happened again. Even before Covid, by late 2019, that spread between cheap and expensive was approaching income extremes. And then it blew past it in, in in Covid, it went to what I in a geeky math joke that no one ever gets called 125th percentile. There is a 125th percentile. Okay, it's the new 100th percentile. I'm trying to convey that it went further and we survived that one too. We suffered somewhat and then we made more than all of it. Back round trip. Good.

I step back and I asked a question, what the hell happened? Why did we see something crazier than 50 years? And then why did it happen again? And that led to this paper, the Less Efficient Market Hypothesis. I do believe that markets have shown, and I think I have some good guesses as to why, that they are more susceptible to bouts of crazy, than they used to be.

But when you say it's painful to try to stay rational during these bouts of irrationality, why is that exactly? Because I get that there are funding costs, I get that there are carrying costs. But on the other hand, you're a big hedge fund with deep pockets. This is presumably what investors are paying you to do. Is it just the emotional trauma or stress of having to explain to everyone why you're taking the position that you have when it's not paying off yet?

That is a big part of it. I have a running fight with one of my co-founders who never gets upset. I'm always upset, but I'm more upset when we're losing money. This is sort of our dynamic. I have to say, I get more upset than Joe where he'll come in my office during a bad period, and I'll be upset. It'll be a bad day in a bad period. He's like, why are you upset? And I'm like, well, because people are yelling at us and I, we're losing money. And he's like, but you're pretty sure we're going to win, right? I'm like, yeah. He's like, and you have all your own money and your kid's money in this, right? So you're not doing anything different. You wouldn't do that if you weren't. I'm like, yeah. He's like, so we're going to win. It's just a question of when, why do you care? And I look at him like he's from Mars and go, why do you not care? And we finally figured out, is it kind of obvious that I talk to clients a lot more than he does?

It's a lot easier to have that attitude when you're just sitting in your office. Also, we are not immune from this. You get even if people love you and think you've done well for 25 years, you have a bad two years, you get redemptions and some of those are of serious size. We fell by like half over about three years. And that's not fun. You have to shrink your firm. You have to let some people you love go. So there is some real pain that goes with that. It does not. That period did not shake my confidence in the actual investment process. I feel bad. I think I did better than our investors because I kept adding and saying, take the ball up on what I do. Not everyone can do that, and I know more than they know. Not in a weird insider sense. And just, I should be more confident in my own process than anyone else's. But it was. It is excruciating. The amount I remember, someone I admire tremendously when Stan Druckenmiller, retired, to run his own money. He's still very active in markets. I think he wrote a note that resonated with me. Because I forget the exact details, but the essence was it's too painful into upsetting to run client money. The man never had a down year. And I'm like, if Stan can take it, those of us. And we've had a lot more up years than down years and life's been good or I won't be sitting here, but we've had never three, but two plus years of of pain. And I'm like, if Stan can't take it, man, this is harder to do than it looks like the whole world thinks you're stupid when you're losing money.

But most I've never seen a model that looks at pain. You just utility the negative of losing money in terms of how long you've lost money for, not just magnitude. Right. And in real life I can tell you a drawdown that is one and a half times bigger, but with six months instead of three years is ridiculously easier to, to live through.

So let's ask the why question, okay. Why are markets becoming less efficient?

Okay. Well, first of all, I and I say this in the piece, a lot of conjecture going on. This is an op ed. As statisticians I think a 50 page. Yeah, a 50 page page. I think academic op ed. Look, this is our first time doing this. You will be convinced I could do a 50 page, single spaced op ed, I believe you. I know you can't, it's just as a quant, as a statistician, you'd like to see 100 bubbles. Have stats on each one. This way they're all they'd rhyme, but they wouldn't be exactly the same. You tease out what's going on. If you see two in a 35 year career, you're not going to be able to prove this statistically. But I believe in my conjectures.

My second favorite, is one I'm sure you've talked about. I know I've listened to you guys talk about it. The rise of Passive Investing. I am not a passive hater. They're really smart people. Mike Green's out there. The amount that guy hates passive. I don't know. The Middle East has never seen hate. Like. Like the amount my green hates passive. But but again, he's a smart. He's a smart guy. He makes interesting arguments. I'm not that guy. I think passive has been a huge positive for an investor. Welfare. I actually was lucky enough to be fairly good friends with Jack Bogle, and he was a hero of mine. We had a podcast briefly, and he did two really, and he came on it finally. I in fact, I'll tell you part of that story in a second. So the rise of I'm not a passive hater, but here's what we know. We know the whole world cannot be passive. And when I say passive, I mean in the Jack Bogle market cap weighted sense, sometimes people use passive for people like us, and they really mean rules based, like you're not. And that's not how I use the word passive. I mean, someone who owns the entire market. Yeah, we're long short and leverage. How do you get to passive on that? I don't know, but some people do. I own the entire market. We had Jack on the podcast and he absolutely agreed. You can't. Everyone can't be passive. Now, of course, being Jack Bogle, he thinks at that point the marginal investor should still move to passive, but he recognizes the obvious fact that if 100% of the people are not looking at prices, nobody's looking at prices. Who's figuring out if Nvidia is worth more or less than the corner drugstore? Right. So the market gets very weird there. We don't even understand what happens there. It's a singularity. I use a physics analogy. We don't know what happens. There are PhD students in finance, and I used to be one of these will stay up late at night in their cups talking about what happens if everyone was passive, what would it even look like? We know it's very weird, and I doubt all the weirdness happens between 99.999% passive and 100. So we're on a curve. We're a lot more passive than we used to be. Even that you're probably aware it's hard to measure exactly how how much is passive direct passive true market cap. Wait, you can measure. But what about people who take, you know, 80 basis points of tracking error? They're kind of mostly passive. Are people pegged to like custom indices? Now it's kind of funny. You guys remember The Princess Bride? Yeah, yeah. Remember mostly dead. That's probably dead. You're mostly passive. So I think fewer people thinking about prices, fewer people willing to take the other side when things get a little crazy. If one if one side really starts to get crazy, there are fewer people out there that has to exacerbate these swings.

My actual number one reason, though, you talked about the gamification. For me, it's the overall, I'm going to sound like a very old man yelling at the sky on my lawn right now, you know, get off my lawn or yelling at the sky. Some Simpsons thing. Yeah. I'm Abe in this case, but someone yells at cloud. Yeah, exactly. Thank you. Social media and the broader environment. I don't want to do politics except to say I don't think you find many people. There'll be some. But I don't think you find many people who don't agree with the idea that this environment has made our politics worse and more dangerous. We confirmation bias. We we live in our own bubbles. We have algorithms that push us further and further towards. You start out as, moderate belief, but it keeps pushing you towards extremes. And, and pretty soon you're saying stupid things like, hey, that Tucker Carlson, he's a good guy. All right, I might have revealed a little poll. Yeah, you did a bit of politics there.

So all of that adds up to making our politics worse, more prone, in particular to swings and extremes. Markets are not arbitrage mechanisms that sometimes misunderstood their voting mechanisms. The price is a weighted average vote where the weight is by dollars. I lucky enough to get more vote than the average person in Warren Buffett, gets a lot more votes than than I get. If we all disagree on on on on opinions. The reason is on an arbitrage mechanism. And here I'll get a little geeky. I imagine you're reasonably sure this thing is mispriced in that Gramm and Dodd sense, and you think it's massively mispriced trading enough to make it a third less mispriced. It's not very risky to you because it's not that big a trade and it's very high expected return because it's that mispriced. Now you've moved it back to a third or maybe half the next part of the trade is much riskier to you because you already have the trade on. So you're just adding more. Oh, I see it. Yeah. And it has half the gain because you've already closed it by half. So arbitrage will not take the if on net more people believe something stupid stupid is going to win. And we're going to be at least somewhat off of real prices. And I find it remarkably easy to believe that this same environment that makes our politics go a little crazy.

For markets to be efficient in any degree, not even perfectly efficient. This famous idea of the wisdom of crowds has to be helping us a lot. The hypothesis that we're all geniuses is never going to fly, right? So the wisdom of crowds and, you know. Well, says, even if on average, most people don't know the answer, the stupid answers cancel. And the right answers don't, because they're the same.

My favorite example of that, and this might be dating myself, is is, Regis Philbin and Who Wants to Be a millionaire? Right. Remember the show? Multiple choice show. It's frightening that you're describing that as old, but I guess it is. Yeah. Yeah, it's been off the air. Sadly, Regis has passed away. It's old. Sorry. Sorry. But you had to answer multiple choice questions, and if you miss one, you're out. They start off ridiculously easy, and they get harder and harder. You had multiple cheats. Like three cheats. One was a friend, and a friend was almost useless. You people a your friend usually wasn't much smarter than you. And b people. At least to me. I didn't watch every episode, but seemed to choose friends who knew the same stuff. They knew. Right. You really want to choose a friend who is in, like, a totally different field? I think in some countries, the friends also had a tendency to deliberately give the wrong answer because they just didn't want to see their friend actually win money. The most cynical phrase ever is nothing succeeds like a friend's failure. There we go. The other one was, eliminate two of the wrong answers. That's great. Yeah, obviously, even if you have no idea, you go from one out of 4 to 1 out of two. The other one was poll the audience. And at least to my non-exhaustive examination, I didn't. I it seemed to work pretty much every time, even if the question was hard,

because I imagine you have 100 people in a room. Ten of them know the answer. The other ones are guessing the 90 distribute evenly over the the four. Maybe not perfectly evenly. It's, but roughly evenly. The ten all end on B, so you pick B because it's bigger work pretty much every time. There's a crucial assumption in that the the audience has to be relatively independent of each other. And they did that. They weren't talking. It was silent voting. If the audience all gets to talk, maybe the ten convince the 90, but maybe they don't. Maybe a demagogue with a better, Twitter feed convinces everyone, and if you ruin the independence and I think we ever come up with a better vehicle for turning a wisdom of crowds into, craziness of mobs, then social media, I'd be hard pressed to to describe it.

I want to pivot a little bit and talk about AI. You've, written or you've talked recently. I forget exactly the word that was used in some of the headlines, succumbing to the rendering or surrendering to the machine, regrets and so forth. What is it? We talk, we try to talk a lot about? I still don't know exactly what it means in any context. What does it mean to surrender to the machines in the income?

Well, first, not not every journalist has Bloomberg's high standards. But I am reasonably certain I said partially in that in the word partially got dropped. Even skipping all the details. Yeah. If you're going to use AI in your process at all, almost by definition, you are going to lose a little intuition. And the way I say that, and it bothered me for a couple of years, I think I slowed us down on AI by a year or two just by saying, you know, we've always prided ourselves on the balance of we intuitively understand why we think we this makes money and the evidence that it makes money. And when you go to AI, you're normally giving up some. Not all.

But let me give you a concrete example. We like good momentum. We like it in price. We like it in fundamentals. One way people, on the quant side, have tried to measure this for years is something like earnings calls, trying to decide if earnings calls are good news or bad news. And if people under react to good news, you want to buy when it's when it's good news. Is this just like how many times people say great quarter guys or are you looking at something else? It's going to sound about as silly as that. Okay, you build up tables of words and phrases with numerical values, and then you say, what's the numerical score of this? And they can be much more subtle than this. I'm going to use a real simple example. The word increasing plus one. Right. And I'm sure you see the floor. If the actual sentence was massive, embezzlement is increasing. You know our bet on that one. The amount of fraud we're seeing in our private credit deals is increasing.

What we do today is we train ML, it's called natural language processing. It's a subfield of out of ML to analyze corporate statements. But what it does, and this is going to be the geekiest thing, I'll say. It represents every corporate statement. It looks across them and represents them as a set of numbers, what the geeks will call a vector of numbers. Then what we do is Paris to say, all right, we have 50 years of this across many firms. We have different vectors of numbers for every earnings call. What combination go long when the first number's good, short when the second number is is is high blah blah blah. What best combination forecasts that seems to be correlated to what we were doing before these word count things just considerably better. It does a better job than word counts.

Here's where you lose the intuition. No, I skip the step. I like to do that. That's fun. Sneaky. If you ask myself, or even some of the younger people who are much more tooled up on, on, on machine learning than I am these days, what does that vector of numbers actually mean? You often get a, we we really can't tell you that. We can say it. It's summing up in a mathematical sense, the information content of that. We still get intuition because this indicator acts like a short term momentum indicator. So it's picking up what we want it to pick up. And it's also done fabulously well for us for multiple years in, in real life. But we are giving up intuition at one stage that we used to not do. So my answer was meant to be much more subtle that there are give ups and intuition. When you move to something like machine learning, they almost have to be. Or else again, what are you doing?

another big multi year decade trend is the rise of the multi strats. And at AQR, as I understand it you have a multi Strat model in there but it's more centralized than some other places. Can you go into a little bit more detail. Sure.

They get used interchangeably but I think that's the difference between multi strat and multi manager. Okay. Multi strat just means I wrote a dissertation on choosing U.S. stocks. We have applied similar things to stocks around the world. Two currencies, two commodities. Two directional bets through trend following we think of these, they are correlated but low. So we think of these as different strategies. And we think a set of our strategies, is better than a single one. Or, you know, it's just the power of diversification. So we're big believers in a particularly if you have a common philosophy. So it's not just fitting the data, it's it's fitting into an overall theme of what you believe in. We're big believers in multi strats.

What we share with multi manager is that belief in diversification. Multi manager is what it sounds like it is. We are one team building these we might of course have little separate teams at AQR. But will one firm building these. They are farming it out to different people. To be frank if you had told me their business model ten, 20 years ago, I would have been very cynical that it worked if you told me, a what? The total fees are going to be when you add up everything that's passed through, through and a fair amount of them and they vary in how quick they do this. If something's not working for what I would consider a very short while. Yeah, they stopped doing it. And I know there are a lot of low to medium Sharpe ratio risk adjusted return strategies that are really good long term but have bad periods. So, if someone told me that model I were to go, you're going to charge a ton and you're going to throw out people have a bad two quarters. No. And there have been people who've obviously proven me wrong.

I think if you look at some crazy times in markets, whether it's, you know, 2019 when some of these measures were getting extreme or just, you know, the Spac mania of 2021, one theory that one might have offered is there. And you just like, oh, yeah, now we have you know, we haven't been in for a long time and yet some of this sort of speculative mania craze is has not gone away. How surprised are you that the move from 0% to, say, 5% or whatever didn't have more of a sapping effect on some of the behavior and speculative froth, or just sort of animal spirits in these markets,

I, I am mildly surprised. Okay. I left this out, but I actually had three possible reasons in my paper. And the third one was super low interest rates for a long time for why things can get crazy. Now the counterargument is once you break people's brains, they don't necessarily repair themselves. Right? Instantly. So I think it was probably a contributory factor. Again, very hard to prove an example of I'll give you a lot of people in 19 and 20 when the spreads between cheap and expensive were here. We're saying it was a super low interest rate environment. And growth stocks have more cash flows in the future. Low interest rates means they're worth more. We did the math on that. It explained like 2% of the increasing value spread. And in 99 2000 interest rates were quite high. That's right. There was no zero 99. So it's not a unified field theory explanation. Yeah. Do I think it helped kickstart some. And again we're in the soft guesswork. But I think these are educated guesses. And I listed it as one of my three. I think it certainly kicked us off on some of these things. Certainly loosen the bounds of rationality. Absolutely. Free money. We'll we'll do that. I don't think it's not human nature that all that the takeaways are and everything comes back. Would I have thought it was a bigger effect in going back to, you know, at one point we hit about 5% on the ten year, almost 5%. What? I thought that would have mattered more. Yeah. Only in 2022 did we see one ugly year, over that. But it has mattered less than I thought. It doesn't mean it will never matter.

All right, Cliff Asness thank you so much for coming on. Odd Lots and kicking off our, ten year anniversary celebrations again?

Yeah, we joke that was so much fun.

That was great. Literally the perfect guest. Literally the perfect guest. One. Well, there's so many things that stuck out from that conversation, but one of the things that stuck out from the conversation, it's this idea about the thing that flips from the conversation, it's this idea about the thing that flips from the conversation, it's this idea about the thing that flips the wisdom of crowds into the madness of crowds. Right? And the idea that maybe the wisdom of crowds theory works as long as everyone is sort of isolated and independent and making their own choice off of the information available to them. But it starts to fall apart when everyone is tied to everyone else, and sort of in the same social network. And, you know, if you think about one of the dominant themes in markets in recent years, it has been people herding into the same positions right? I found that to be really fascinating.

I think that's where it makes a lot of intuitive sense. It probably can explain a lot of things about the world of politics, about the world of markets, etc. this idea that we're all just sort of one connected global village, as Marshall McLuhan put it, we're all just gossiping each other all the time. We're just constant talk, talk, talk.

No, that's a very interesting idea. I also do is interesting, the idea of, length of drawdown versus depth of drawdown and the, the former being more painful, which strikes me, is something I hadn't I hadn't really heard anyone talk about that before, but especially from the perspective of a manager of other people's money, it's a very highly intuitive that makes a lot of sense to me that, okay, like, yeah, you had a bad quarter or whatever event you're like, oh, your ideas are just out of date. It's been three years since you've made money. Maybe time to rethink some of your fundamentals assumptions.

People are impatient. That's one thing I've learned over the course of ten years. Yeah. The other thing was the idea of markets not necessarily being an arbitrage mechanism, which I think is very counter intuitive to the way a lot of people will think about markets and this idea that like, well, sometimes you can't compress the price all the way to where it should be rationally or logically or according to EMH or whatever, because the reward just isn't necessarily there to get to that. Like final 10%. It's interesting to, to think about, the sort of link between patterns and interpretability, why something works. And in our conversation, a couple of weeks ago with Ian Dunning of Hudson River trading is like they do not put a lot of emphasis on interpretability. There's a pattern and there's some reason to establish that the pattern works. It makes money. The idea that they then have to also come up with an economic story about why it works is not so important to them. Maybe that's because it has to do with time frames. Obviously, Cliff's, trading time frame is going to be very different than a high frequency trading firm like, HRT. But it is interesting. And then it's interesting to think that even in the most established quant patterns, like why do cheap stocks outperform more expensive stocks over the long term? Right. Even there, there is dispute about why this pattern holds, even though it feels a little bit more intuitive.

So much interesting stuff here. It's also, I guess it sort of warms my old cynical heart, that maybe, maybe the edge for humans will be, spotting the regime change, right? Which, you know, at least there's something left for us to do if it's not just pure pattern recognition. Shall we leave it there? Let's leave it there. All right. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway

and I'm Joe Weisenthal. You can follow me at the stalwart. Follow our guest, Cliff Asness He's @CliffordAsness Follow our producers, Carmen Rodriguez, and Cale Brooks. And for more Odd Lots content, you can check out our daily newsletter that is at bloomberg.com/oddlots and you can join fellow listeners in conversation in our discord - discord.gg/oddlots And if you enjoyed this conversation then please like leave a comment or better yet, subscribe! Thanks for watching.