Masters in Business: OSAM Patrick O'Shaughnessy
Reflecting on the January 2015 episode of Masters in Business where Barry Ritholtz interviews Patrick O'Shaughnessy of O'Shaughnessy Asset Management
https://www.bloomberg.com/view/articles/2015-01-12/masters-in-business-patrick-oshaughnessy
I just spent an hour listening to Patrick O'Shaughnessy talk about investor psychology, and I'm pretty sure my bank account is judging me for all the irrational financial decisions I've made. Obligatory full disclosure: I have absolutely zero credentials in finance. My greatest investment achievement to date is finding a 20 euros bill in an old jacket pocket, which I promptly spent on takeout instead of investing it. (This is exactly the kind of behavior O'Shaughnessy would probably use as a case study in irrational decision-making.)
What struck me most about this conversation was how our caveman brains are fundamentally incompatible with modern financial markets. We're walking around with Stone Age hardware trying to run Wall Street software, and the system crashes constantly. No wonder we're all so bad at this.
The Only Edge That Matters
O'Shaughnessy makes this fascinating point that "the only persistent advantage in markets is understanding investor psychology." Everything else changes—technologies, companies, economies—but human psychology remains stubbornly consistent. We keep reacting to the same stimuli in the same ways, generation after generation, bubble after bubble.
When I think about my own investing "strategy" (a generous term for what is essentially panic-buying during upswings and panic-selling during downturns), it's embarrassingly predictable. I'm basically a lab rat hitting the same lever over and over, expecting different cheese to appear.
The most depressing part? I know I'm doing it while I'm doing it. Self-awareness doesn't seem to help much when your limbic system is screaming "DANGER!" because a stock dropped 2%.
Brain-Damaged Investors Make Better Decisions (Wait, What?)
There's this study O'Shaughnessy mentions called "Lessons from the Brain-Damaged Investor" that I can't stop thinking about. Researchers had two groups play an investing game: normal people and people with damage to the part of their brain that processes fear.
The game was simple—flip a coin, heads you win $2.50, tails you lose $1. Mathematically, you should play every round (the expected value is $1.25 per flip). But guess what? The normal people only played 57% of the time, while the brain-damaged folks played 85% of the time.
Why? Because after normal people lost a round, they only played 41% of the time in the next round. They felt the sting of loss and became irrationally cautious—even though each coin flip was completely independent.
I'm sitting here wondering if I should be concerned that I identify more with the "normal" group. Maybe I need a very specific brain injury to become a better investor? (Note to self: Do NOT pursue this as an actual strategy.)
The Gazelle That Wanders Gets Eaten
Ritholtz shares this perfect analogy about Mutual of Omaha's Wild Kingdom (I have no idea what this show is about). The gazelle that wanders away from the herd gets eaten by lions. There's evolutionary safety in numbers—which explains why we feel so comfortable doing what everyone else is doing, even when we know it's probably wrong.
The problem is that our biology evolves at a glacial pace compared to our culture. We're still wired to avoid lions on the savanna, not navigate complex financial markets. Our hardware is running outdated software, and the patches aren't coming anytime soon.
The Japanese Bubble: A $6 Million Lemonade Stand
O'Shaughnessy tells this wild story about the Japanese asset bubble of 1989, when their market was trading at 90 times earnings. Some industries were at 250 times earnings! He uses this perfect example: at those valuations, a kid's lemonade stand making $50 a day would be worth about $6 million.
And yet, at the time, everyone was terrified that Japan was going to take over America. They were buying landmark buildings and overpaying by hundreds of millions just to set records. Michael Crichton even wrote a book about the Japanese corporate takeover of America called "Rising Sun."
In retrospect, it sounds absurd. But I guarantee I would have been right there, frantically converting my dollars to yen and learning to say "would you like fries with that?" in Japanese.
The charts of all major bubbles look identical, O'Shaughnessy points out. Dutch tulips, South Sea crisis, Japan, dot-com, housing... strip away the specifics, and the pattern is the same. We never learn because we can't help ourselves. Our psychology doesn't evolve, even if the asset class does.
The Rustle in the Grass
Here's why we're so terrible at investing: imagine our ancestors walking through tall grass and hearing a rustle. They could make two mistakes:
1. Get alarmed over nothing (wasted energy)
2. Ignore it and get eaten by a lion (game over)
Evolution favored the paranoid. The ones who jumped at every rustle survived long enough to reproduce. The chill, rational ones became lunch.
This explains why we're twice as sensitive to losses as we are to gains. It's not a character flaw—it's an evolutionary feature. Great for avoiding predators, terrible for maintaining a diversified portfolio during market volatility.
The Inflation Tax Nobody Talks About
Even at a modest 2-3% annually, inflation is silently eating away at your purchasing power. O'Shaughnessy points out that since he was born (he's 29), the purchasing power of the dollar has been cut in half.
This means the "safest" investments—cash, bonds, T-bills—are actually the most dangerous over the long term. They create the illusion of stability while guaranteeing you'll lose purchasing power.
And that 10% stock market return everyone cites? It's more like 6.5-7% after inflation. Still good, but not quite the wealth-building rocket ship we're led to believe.
I'm guilty of keeping too much cash "just to be safe." But safe from what? Not from inflation, apparently. It's like I'm protecting my money from the possibility of loss by guaranteeing it instead, but cannot do otherwise. Losing electricity for one day has shown that cash is still the king.
The Cruel Paradox of Youth
"The major bummer about investing," O'Shaughnessy says, "is that everyone that's interested in it has squandered the advantage of youth."
This hit me like a ton of bricks. The best time to start investing is when you're young, which is precisely when most people (myself included) care the least about it. When you're 22, retirement feels about as relevant as planning your 90th birthday party.
By the time you start caring about investing, you've already lost your greatest advantage: time. Those early years of compounding are irreplaceable. It's like showing up to a marathon when it's half over and wondering why everyone else is so far ahead. I remember my colleague and friend telling his stories about investments he made instead of drinking another beer and I was not listening.
I wish I could go back and shake my 22-year-old self, who spent money on [embarrassing purchase redacted] instead of trying to work out how to make money making money. But I can't. All I can do is make better decisions now and hope that 60-year-old me doesn't find a way to travel back in time to shake present-day me.
Final Thoughts: Remove Yourself from the Equation
The most practical advice from this whole conversation? "Remove yourself from the equation." Our psychology is the problem, so the solution is to take it out of the process as much as possible.
Automate your investments. Follow rules, not feelings. Don't check your portfolio during market crashes. Pretend you're investing for someone else if that helps create emotional distance.
I'm trying to implement this in my own financial life, with mixed results. It's hard to ignore that voice in your head that says "THIS TIME IS DIFFERENT!" (Narrator: It never is.)
But maybe that's the first step—recognizing that the voice exists and understanding where it comes from. Our brains evolved to keep us alive on the savanna, not to maximize risk-adjusted returns in a global market economy.
So I'll keep trying to outsmart my own psychology, even as I acknowledge the fundamental absurdity of using my brain to try to overcome the limitations of... my brain.
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