Odd Lots: Cliff Asness on How Markets Got Dumber in the Last 10 Years

Podcast: Odd Lots (Bloomberg)
Hosts: Joe Weisenthal & Tracy Alloway
Guest: Cliff Asness, Co-Founder and CIO of AQR
Date: November 13, 2025

Episode Overview

This episode commemorates Odd Lots’ 10th anniversary with special guest Cliff Asness, legendary quant and co-founder of AQR. The discussion dives into a provocative thesis: that market behavior and capital allocation have gotten “dumber” over the past decade, as evidenced by the resurgence of retail participation, meme stock frenzies, the influence of passive investing, and the rise of AI and gamification. Asness offers a nuanced, candid exploration of why markets don’t behave the way textbooks suggest, how inefficiencies and bubbles recur, what AI means for quant investing, and how even the “wise crowd” can tip into herd-driven madness.

Key Discussion Points & Insights

1. Ten Years of Odd Lots and Market Evolution

• Odd Lots’ 10th Anniversary: Joe and Tracy reflect on a decade of coverage, reminiscing about their early episodes and the massive changes in market dynamics since their start.
  • [01:29] “A lot has changed in that period. Sometimes mind blowing.” – Joe Weisenthal
  • [02:49] “Let us tell you about the days when price actually mattered.” – Tracy Alloway
• Reflecting on Changes: The shift from fundamental investing and rational price discovery to gamification, meme coins, and investors piling into trends regardless of fundamentals.
  • [03:41] “People betting on random meme coins, things like that... a fundamental shift in the market.” – Tracy Alloway

2. Cliff Asness: Rational Investing in an Irrational World

• Backstory: Asness’ roots in academia under Eugene Fama and early work on price momentum, which itself challenged efficient market dogma.
  • [05:22] “My dissertation advisor was a little known guy named Eugene Fama.” – Cliff Asness
• Momentum as Rational vs. Irrational:
  • “Momentum is often thought of as this index of irrationality. It can work because of feedback loops ... or because of what behavioral finance people call underreaction.” [06:16]
• Surviving Bubbles and Drawdowns: Lessons from the dot-com and COVID bubbles, and how extreme divergences between cheap and expensive stocks can suddenly and painfully revert.
  • [10:52] “It was the craziest thing numerically in 50-plus years... then it happened again even before COVID.” – Cliff Asness

3. Why Do Irrational Markets Happen… and Keep Happening?

• Measuring Inefficiency: Asness tracks the spread between the cheapest and most expensive stocks as a sign of market “craziness” versus past history.
  • [13:27] “Most of it is quantitative... the spreads between cheap and expensive.”
• Defining Market Efficiency: Focuses on disconnects between price and net present value of future free cash flows; more inefficiency means larger (but harder to hold) opportunities.
  • [13:33] “Much closer to the first one.” (about defining efficiency via value anchoring, not just exploitable profit)

4. The Real-World Pain of Being Rational During Irrational Markets

• Emotional and Business Challenges: Managing client expectations and redemptions is often harder than handling personal portfolio pain.
  • [16:09] “That is a big part of it... people are yelling at us... It is excruciating. The whole world thinks you’re stupid when you’re losing money.” – Cliff Asness
• Length vs. Depth of Drawdown: The length of time underperformance lasts is often more painful than the size of losses.
  • [18:52] “Length is much worse. When something goes on... six months, then six months, people lose patience.” – Cliff Asness

5. Why Are Markets Less Efficient? Cliff’s Conjectures

• Conjecture 1: Rise of Passive Investing
  • [26:54] “I’m not a passive hater... but the whole world cannot be passive... fewer people thinking about prices, willing to take the other side.” – Cliff Asness
  • [28:12] “You’re mostly passive.” (reference to “mostly dead” in Princess Bride)
• Conjecture 2: Social Media and Gamification
  • [28:45] “Social media and the broader environment makes our politics worse and more dangerous... Markets are voting mechanisms, not arbitrage mechanisms.” – Cliff Asness
  • [31:25] “Wisdom of crowds... works only if the crowd is independent. Have we ever come up with a better vehicle for turning wisdom of crowds into madness of mobs than social media?” – Cliff Asness

6. Retail Participation and Option Mania

• Retail in Zero-Day Options: The surge in retail option trading amplifies inefficiencies; retail makes the market more prone to extremes and, on average, loses money to institutions.
  • [21:54] “There’s a lot of academic work that shows retail on net loses… if they’re a bigger force in markets, you’re going to have more of that going on.” – Cliff Asness
  • [22:40] “Zero day options, my god, they’re making exactly the people they claim to despise on Wall Street very rich.” – Cliff Asness

7. The Madness of Crowds vs. Wisdom of Crowds

• Key Moment: The difference between an independent crowd (wisdom) and a connected, herding crowd (madness) – especially under social media influence.
  • [33:54] “If the crowd is making independent decisions... you get some degree of wisdom. When the crowd is all making a unified decision... you are much more susceptible to what quants call ‘cray cray.’” – Cliff Asness

8. Quant Investing, AI, and the Loss of Intuition

• AI in Quant Processes: AI, particularly NLP models, can identify patterns that traditional quant screens can’t, but at the cost of losing human intuition.
  • [35:26] “If you’re going to use AI... you’re going to lose a little intuition. And it bothered me for a couple years.” – Cliff Asness
  • [37:05] “If the actual sentence was ‘massive embezzlement is increasing’—our bad on that one.” (on naive sentiment analysis)
  • [38:28] “If you ask... what does that vector of numbers actually mean? We really can’t tell you that.” – Cliff Asness

9. Multi-Strat vs. Multi-Manager: Industry Shifts

• Diversification & Talent Wars: Asness explains the difference between multi-strategy vs. hiring/firing multiple independent managers and how competition for quant talent has intensified.
  • [39:59] “Multi-strat just means... applying similar things to stocks around the world, currencies, commodities...” – Cliff Asness
  • [42:21] “Talent is the thing that’s capping multi-strat expansion.” – Tracy Alloway

10. Why Do Quant Factors (Still) Work?

• No Monolithic Explanation: There’s ongoing debate as to whether value and momentum persist because of risk, behavioral bias, or both—which might vary over time.
  • [44:22] “Is there complete consensus about why these factors work? Not at all.” – Cliff Asness
  • [45:50] “Both explanations can be true, and they can be true at different times. Life isn’t so simple.” – Cliff Asness

11. Sports Betting and Prediction Markets as Finance Analogy

• Overlap with Quant Investing: Sports betting analytics and prediction markets share many traits with quant investing—and the rise of sports betting is both interesting and concerning from a behavioral perspective.
  • [49:28] “Toby [Moskowitz] wrote a book called ‘Scorecasting’... the sports analytics, the Moneyball type stuff looks a lot like what we do.” – Cliff Asness
  • [51:47] “A bunch of 20-something-year-old... guys in my extended family... they’re not even rooting for their teams anymore. They’re rooting for this player to score on their prop.” – Cliff Asness

12. Why Did High Rates Not Kill Market Speculation?

• ZIRP’s Lingering Effects: Despite higher rates, risk behavior and speculative excesses remain, challenging the idea that rates alone enforce rationality.
  • [53:37] “How surprised are you that the move from 0% to, say, 5%... didn’t have more of a sapping effect on... animal spirits?” – Joe Weisenthal
  • [54:21] “Would I have thought that would have mattered more? Yeah... but it has mattered less than I thought. Doesn’t mean it will never matter.” – Cliff Asness

Notable Quotes & Memorable Moments

• On Bubbles Recurring:
  “Do you think you’re ever going to see that in your career again? ...I think I would have said... probably not, hopefully. I wouldn’t say definitely. No one who does what any of us do for a living should say definitely. That’s a bad word in markets.”
  — Cliff Asness [10:52]

• On Pain in Asset Management:
  “It's not fun for a business to go through that... the whole world thinks you’re stupid when you’re losing money. No matter what evidence you can point to.”
  — Cliff Asness [16:09]

• On Market Structure and Efficiency:
  “If the crowd is making independent decisions... you get some degree of wisdom. When the crowd is all making a unified decision... you are much more susceptible to what quants call ‘cray cray.’”
  — Cliff Asness [33:54]

• On AI and Quant Intuition:
  “When you move to AI, you're normally giving up some intuition... If you weren't giving up some intuition, what the heck is the AI doing?”
  — Cliff Asness [35:31]

• On Gamification and Retail Trading:
  “They’re making exactly the people they claim to despise on Wall Street very rich by trading these things [options]. And it’s just FanDuels.”
  — Cliff Asness [22:40]

Timestamps for Key Segments

• [04:55] Cliff Asness joins; on rationality vs. irrationality in markets
• [10:02] The dot-com and COVID bubbles: enduring and surviving extreme spreads
• [13:27] On measuring market inefficiency: spreads, bubbles, and interpretation
• [16:09] The pain of sticking with rational investing during irrational times
• [21:54] The role of retail investors and options trading in modern markets
• [26:54] The rise of passive investing and its systemic consequences
• [28:45] Social media as a force for crowd madness
• [33:54] The transformation of “wisdom of crowds” into “madness of crowds”
• [35:26] The tradeoffs and challenges of bringing AI/machine learning into quant strategies
• [44:22] Debate over why quant factors (like value, momentum) work
• [49:28] Sports betting: analogy to markets, behavioral pitfalls, and data edge
• [53:37] Questioning if higher interest rates will bring back rational market discipline

Recap: Big Takeaways

• Markets have become more susceptible to inefficiency and crowd-driven mania, due to factors like passive investing, gamification, and especially the amplifying effects of social media.
• These market “bouts of crazy” present larger opportunities but are emotionally and structurally much harder to stick with.
• AI brings power and pattern-recognition at the cost of human interpretability—a tension for quant investors who value both empirical evidence and economic intuition.
• The line between markets and entertainment (sports betting, meme stocks, etc.) is blurrier than ever, with human behavior at the core of both.
• The key challenge for human investors may increasingly be recognizing and surviving regime changes—something machines may not do as easily.
• Even with new technologies, enduring truths remain: crowd wisdom only emerges from independence, not herd behavior. “Cray cray” is now, in Cliff’s words, a technical term.

End of Summary