Cliff Asness: Broken Markets: The Illusion of Control in Modern Financial Markets

During this interview with Bloomberg, Cliff Asness discusses the unpredictable nature of financial markets, reflecting on his experiences since 2002. He highlights how extreme events, like the tech bubble and COVID-19, challenge assumptions.

Asness emphasizes the importance of understanding both severity and duration in investment pain, noting that prolonged downturns are particularly tough. He criticizes the illusion of control brought by information overload from the internet and social media, suggesting that despite faster information access, true market efficiency remains elusive.

He also comments on the misleading confidence fostered by superficial knowledge, exemplified by the meme stock phenomenon.

Here’s an excerpt from the interview:

Asness: If you ever have the misfortune to have an investment that ever goes down for any amount of time. You will learn something that they don’t teach you in a Ph.D. program. Severity is bad, but duration is underrated when it comes to pain.

Three years of pain, even if it’s cumulatively not worse than a year and a half of pain is a ton worse. The first year you go back to your clients and go, We think we’re right. Look what’s going on here. And you go, okay, okay.

The second year, they’re like. That’s the same thing you said a year ago. And you go. Yeah, but it’s still going on and we’re still going to be right.

The third year. I mean, I’m. I’m still invested. But it’s getting tougher. So duration counts. So we’ve seen both the severity and the duration of those. So I start out just observing facts. And then in trying to fill in why admittedly, this is a lot of op ed, this is very hard to prove.

And I love to you know, I’m a card-carrying quant. I love to, you know, produce tables. I can show you these spreads, but why and I tend to have I think it’s a multitude of things.

I think the number one thing is probably the thing we all love to blame the Internet and social media. I think a lot of people naturally assume such a thing would bring us information so quickly and so ubiquitously, knowing everything that prices would be very efficient.

But that’s never been the hard part. When I started in this industry, we got earnings within 20 minutes, they’re missing 20 minutes and a nanosecond matters to an HFT. It doesn’t matter to almost every other investor.

We didn’t really materially get more. And I do think that level of information overload gives people a lot of illusion of control.

I you know, I don’t want to go into this deeply because I know you’d like to get me going on this, but I think the meme stock examples, I don’t think they’re the norm by any means, but I think they’re the ultimate example of a little bit of information making you think you really know something very deeply. And I think that gets into market prices.

You can watch the entire interview here: