Join us for an enlightening and thought-provoking journey with Wall Street legend Jim O'Shaughnessy as he transitions from quantitative investing to venture capitalism with O'Shaughnessy Ventures. Discover Jim's innovative concept of the Human OS, where understanding cognitive biases and assigned beliefs can pave the way for greater clarity in our ever-evolving world. We unpack his vision of the Great Reshuffle, contrasting it with the World Economic Forum's Great Reset, offering fresh perspectives on societal transformation.

We tackle the intensifying polarization in media and its profound societal impacts, drawing parallels to the partisan newspapers of the American Revolution. Learn how media outlets, driven by the survival and profitability in the attention economy, have adopted more polarizing stances. Through historical examples like Edward Bernays and modern shifts during Donald Trump's presidency, Jim illuminates the historical power of propaganda and underscores the critical importance of questioning the information we consume.

Embrace the wisdom of crowds and the critical role of neuroatypicals in tech development as we discuss the democratization of technology and its potential for groundbreaking innovation. We explore the emotional complexities in investment strategies, from the 1987 market crash to the integration of AI in decision-making. Jim's infectious optimism shines as he champions a positive mindset, urging us to root for positivity in a world often clouded by pessimism. This episode promises to be a compelling listen for anyone navigating today’s complex and dynamic landscape.

Sebastian David Lees: 0:34

Welcome to the Fat Tony's podcast, where we bridge the gap between everyday life and expert insight. Join us in conversation with real-world experts, gaining practical advice and strategies to navigate the edition of the Fat Tony's podcast.

I'm your host, Seb Lees. Today's guest is Wall Street legend Jim O'Shaughnessy. Jim is an American investor and venture capitalist, currently serving as the CEO of O'Shaughnessy Ventures. He is also the founder of O'Shaughnessy Asset Management, an asset management firm that was later acquired by Franklin Templeton. As if that wasn't enough, he's also written several books, including the bestsellers what Works on Wall Street and how to Retire Rich. What struck me most about talking with Jim was not just the breadth of his knowledge, but also his infectious optimism. I really, really enjoyed my conversation with Jim, and I hope you do too. Jim O'Shaughnessy, welcome to Fat Tony's. It's great to have you here. Thanks for having me, Seb. Yeah, how are you.

Sebastian David Lees: 2:07

How's your week going?

Jim O'Shaughnessy: 2:43

You know, with O'Shaughnessy Ventures, every week is an adventure. Because we have so many different verticals within the company, my days are never boring. I can go from three documentary pitches to a hard science founder looking for funding through our adventures arm. Then we also have a book publisher coming online, so reviewing book proposals from folks. So always something different and always something quite interesting.

Sebastian David Lees: 2:07

I want to come back to OSV a little bit later and that change that's happened fairly recently from kind of the quantitative background into more venture capital. But I want to start with. I hate softball questions, but I want to start with a softball question just for listeners who aren't familiar with yourself. I don't want to do the tired thing of oh you know, tell us about your background. What I want to ask is, for those that do follow you on social media, there are two phrases that come up time and time again, and that is human OS and the great reshuffle. Tell us about those.

Jim O'Shaughnessy: 2:43

So human OS is a term that I stole from my friend, Brian Romelli human operating system. I loved it when I first heard it because it really encapsulated this idea that you know, we're all walking around with these quantum computers in our head and we have no operating menu, and a lot of the problems that we face as society are probably laid at the feet of the fact that, hey, there's no operating manual for human OS. And so what I try to do is come up with ideas for at least trying to figure the code out a little bit better and offer suggestions borrowed from a Dr Orr who imagined wouldn't it be interesting if we just separated our brain? As a thinker who can think any thought it wants, right, it couldn't be like Lewis Carroll it can imagine three impossible things before breakfast. But once the thinker lands on something that resonates with it, it generally tosses it over to the prover and stops thinking about it. The prover's job is very, very simple it just shows you everything you want to see to make that belief a reality. So it is the ultimate confirmation bias machine.

And the more we understand that many of us are 80% of the time in prover mode, not thinker mode, we can see and unravel a lot of the current controversies, all of the squabbles, etc. Just shouting at one another without really listening, or sometimes I say we're shouting at each other in different languages and not listening, and the thread goes on to suggest some ways that you can reawaken the thinker and rethink ideas. Because one of my other observations about human OS is very few of us and I include myself in all of this, by the way, I'm not exempt in any way, in fact, I probably am more difficult to wrap your arms around is many of our beliefs are assigned to us. We didn't come up with them.

They were assigned to us by our parents, by our friends, by our colleagues, by our religions or our governments, and we never really take the time to really look at them and say does this really make sense? Do I really believe this? And so human OS is just something I am endlessly fascinated with and try to always look at something through a reframe, which is a very powerful exercise, in my opinion. If you can reframe something, you suddenly see it as if you put better glasses on. In terms of the Great Reshuffle, I started with that theme around 2014-15. I noticed that lots of things that used to work weren't working quite as well as they used to, and that got me into a very deep and wide rabbit hole about what's really going on when we look at the world through a sociological lens, through a political lens, through an entrepreneurial lens, etc. Through a technological innovation lens, and essentially, what I decided was we're really going through a phase change and it is going to reshuffle lots and lots of things, both who's on top, who the elites are, what kind of ways to convince people of things work and don't work. As an example, I often tease the World Economic Forum on Twitter because to me, they're tone deaf. If you see their campaigns, you're aware of them, I'm sure. Right, it's 2030, and you are happy and you own nothing. And I think that it's a classic example of a campaign that both would have been taken seriously and might have had some impact circa 2010. But now, in 2024, it literally is just providing memes for people like me to say, yeah, don't think so, don't think so. Now.

There's a challenge there, because they sometimes confuse their term, which they call the Great Reset, with my term called the Great Reshuffle. The Great Reset envisions a world. In my opinion and of course, this is all just my opinion and I'm often wrong, so let's get that in there but the Great Reset is a top-down way of looking at the world, is a top-down way of looking at the world. We know what's right for you, we are smarter than you, we plan better than you and you, you docile little sheep will do as we say.

The Great Reshuffle emerges like an all-complex adaptive systems. All emergence is coming from below, and when you watch these two in conflict with one another, it's quite entertaining, but also quite illuminating as well. People are waking up to the fact that many of the old models are collapsing. If you think about things like publishing, filmmaking, podcasting, the power of a single publication like the Wall Street Journal or the New York Times to command everyone's attention, that's all going away and what we're seeing is what I refer to as a lengthening of the tales. The mathematician Mandelbrot, who gave us fractals and other wonderful things, has a great book called the Misbehavior of Markets.

Sebastian David Lees: 9:46

One of my favorite books of all time.

Jim O'Shaughnessy: 9:48

As it is one of mine and it's worth it for anyone listening. If you buy it, you could buy it just for the chapter in which he dismantles efficient market theory, and he does it with evidence and empirical data, which is something I have a weakness for. Anyway, one of the points of the book is we are moving into an age where we are going to start seeing a good number of things become chaotic, normal, which is a very peaky middle with very long tails, and that's moving us out of a long period of time where everything was designed for a normal distribution right. So 68% is the sweet spot that's right in the middle that captures 68% of the population. It's normally done for things like IQ, but you can do it for everything, for height, weight, etc. I'm more interested in the part where it's looking at ideas and innovation. We went from mass production, in my opinion, to we're moving into. We're still in early innings here, or I don't know. What would it be in cricket? What are the first few? What do you call the first few sets?

Sebastian David Lees: 11:09

I'm an English man that actually doesn't really understand the rules of cricket.

Jim O'Shaughnessy: 11:23

Oh, my god, I love you. All my British friends always tease me for like. Well, I've heard you say, jim, that isn't cricket. Do you know the rules?

Sebastian David Lees: 11:28

And I'm like no, no, well, you know I'm from. My hometown is Nottingham, which has one of the most famous cricket clubs in the world, trent Bridge, and the amount of people I say, oh, I'm from Nottingham, oh, trent Bridge. And the amount of people I say, oh, I'm from Nottingham, oh, trent Bridge. And when I say, oh, I've never been, and they look at me with a kind of disgust. But you cannot quantify. I love it.

Jim O'Shaughnessy: 11:48

So I think we're in the very early innings of mass customization. You saw us developing it. I tried first to develop a mass customization tool for investing called Netfolio, back in 1999, 2000. The tech wasn't quite there yet, but we beavered away and continued to build all of our own systems so that they were very specific, just for our needs. And then my son Patrick walked in my office and he goes. You know, we built the Death Star to kill a mouse, dad, we should pull an AWS and make this available to all of our clients, and it was custom indexing.

You don't any longer have to have your service, your product, your entertainment devised and specifically aimed at the 68%. We now have the tools where you can have a much smaller market and still do extraordinarily well. It's why you see all of the various podcasts popping up. Everyone says, well, you know late stage podcasting. I think they're very, very wrong.

I think we're at the very beginning of a huge number of new podcasts coming online, because they can be very specific to something like I don't know fishing and or, you know, whatever your hobby is, you're going to be able to find your audience. And because we have all of these tools coming online, like AI, like the ability to do what we're doing right now to have a chat with somebody who's in England and then another one who's in Connecticut, and it's seamless. So if that is correct, and if that thesis is correct, then you're going to see all of the older models just really literally continue to collapse. One of the things you'll see, I suspect, is what we saw when Napster came along. Right when Napster came along, the then-dominant powers reacted the way they always reacted sue, sue, sue, put them out of business. We will not allow this to take place. And, of course, the market wins, and we're at a very similar situation now.

Sebastian David Lees: 14:19

It's interesting. We were talking about Napster a couple of days ago on Fat Tony's, and we were talking about how that natural reaction is to sue and the noughties. I remember being at school my friend handing me Napster on a floppy disk. I have a very, very clear memory of that. And then so you have the suing of that and this knee-jerk reaction and then 10 years later, once the bandwidth improved and streaming became a threat, you have the suing of videos and it's almost like you go through this cycle of knee-jerk reaction to sue to the light bulb moment of hey, people want to pay for this. If we can make it frictionless, people won't pirate.

And going back a little bit to I asked you to talk about human OS and also the great reshuffle. I don't think I'd ever really thought about the connection between those two concepts until now. And when I think about what you were saying about human OS on one side of your brain being kind of the ultimate bias machine, and I think about I think it was Karl Marx. I think it was Karl Marx that first coined the term ideology and he described it as this kind of colorless, odorless gas that creates a prison without the need for bars. And then I think about what you were saying about the long tail and changes that are happening in the Great Reset, and I think about the polarization that traditional media is encouraging to stay relevant and they're kind of hacking that second half of the human OS system there to kind of shout louder and louder and in an attention economy that suddenly has an order of magnitude more competition than it did a decade ago, traditional media has to be more polarizing.

I think that's exactly what we're seeing and you know it's frustrating because my opinion anyway and like you, I'm I'm very frequently wrong, but you know, you see these people shouting on twitter and other forms of social media and it's like you guys are the same. It's like two sports fans and one's wearing a blue shirt and one's wearing a red shirt and they're shouting at each other. It's, you know, the only difference is the color of your shirt. And I guarantee and you know, I absolutely guarantee that the average labor or should I say the average Democrat and Republican to Americanize this slightly the average Democrat and the average Republican voter have far more in common with each other than they do with the people at the top of their respective power structures, absolutely.

Jim O'Shaughnessy: 16:53

Yeah, I agree. And the idea behind the Great Reshuffle. Even you slipped and called it the Great Reset there.

Sebastian David Lees: 17:03

Oh did I. Sorry, I have to sort edit that in post production.

Jim O'Shaughnessy: 17:09

But the idea is, yes, you're correct about the major media. They view it as in their interest to become more polarizing, not less. We have a history example for this, though. Back during the times of the American Revolution and afterwards, each party had its own newspapers and they shouted at each other in print for quite some time, trying to win the day and for the ideas that were then percolating in the United States. But now I think it's done primarily for just survival and profitable motives. Take the New York Times. So the New York Times. I still take the New York Times, even though it I mean honestly, I think Pravda would blush by the comparison now to the New York Times. Even though it I mean honestly, I think Pravda would blush by the comparison now to the New York Times, because they realized and like, if you're looking at it as a wise investment decision, they were right. They realized that, especially when Donald Trump got elected, that seemed to break everyone's minds, not just here in the United States but globally, and so they even have a name for it called Trump derangement syndrome and the idea that you could do considerably better if you picked a side and became the pravda, if you will, for that particular side. So that's what the Times did. Guess what happened? Their circulation went way up, their revenues went way up. They would hate to hear this, but I think it's true. They were saved by Donald Trump Because, essentially, everyone was feeling unmoored and they were searching for their tribe, and so the loudest signal was like a schnulling point, and that's where they all gravitated toward.

Now, on the other side of the aisle, there was always Fox News. There was always that type of thing. So it's not just on one side, it's both sides. And I think that I'm always amused. I stopped watching television news 12 years ago because I was seeing it just devolving into almost poison for the mind. And people would say, and I would tell them oh, it's just like a cloud lifts, just read your news. You don't have to have the propagandists shouting at you 24-7. And the replies were almost always the same, from very bright people, I might add. They would say yes. If it was a more liberal friend of mine, they would say yes, you are exactly right, fox News is pure propaganda, but PBS is really, really good. And then the conservatives would say yes, you are exactly right, but it's the Wall Street Journal that hasn't gone insane. And my God, look at the New York Times and the Guardian and all of these particular publications, because of the prover saying all you're seeing. All you're seeing is one point of view. You're putting yourself in a bubble and you're self-selecting into that bubble, and when all you hear is the same opinion played back to you time and time again, well, welcome to the soul of propaganda. Right, this is Edward Bernays, who was not a good guy if you want to look into his history, but he was quite clever and he was the guy who changed the name of propaganda to public relations. No, no, no, no. Let's rebrand this. It's not propaganda, we're relating with the public. And if you look at his history I mean again if you're a Machiavellian who likes kind of evil things. Put, this guy was hired by the United Fruit Company to reverse a democratic election in Guatemala because they didn't like the new government. He didn't fire a single shot. He did it all through propaganda.

And the power of propaganda is quite evident in everything you see, read or hear. I often say like. One of the things I've internalized is, whenever I'm reading anything, I always ask myself even if I agree with it, I say to myself why am I reading this now? Who benefits if I believe this, who suffers if I believe this, et cetera. By playing with that human OS aspect and trying to continually take your mind through. Wait a minute, why am I reading this now? Who benefits, et cetera. Am I reading this now? Who better, who benefits, etc. You see this, and it's it's almost like putting on a new pair of spectacles and saying, oh my god, this is so obvious. And I think it was lord whitehead who said all great periods are also chaotic periods, and I think that we're kind of right now in the middle of one of those it's's like the ancient Chinese curse may you live in interesting times.

Sebastian David Lees: 22:22

Which I think is actually an urban myth.

Jim O'Shaughnessy: 22:26

I do too. Yeah, as it turns out. I think, Sebastian, I think most of our favorite examples are, in fact, myths or apocryphal stories. It's like the frog right, the boiling the frog. That isn't what happens. When you turn the heat up, the frog jumps out of the thing because he feels the heat.

Sebastian David Lees: 22:46

Never let the truth get in the way of a good story is a motto I've heard time and again. Exactly, it's interesting what you're saying, though. Is this a downside? The long tail that's emerging with the Great Reshuffle? You're talking about revolutionary times, where you had different papers that would shout at each other, but back then you would still be confronted with a more balanced reality in your day-to-day life. Now, yes, if I am fascinated by restoring 1950s toy die-cast metal cars, I can create a business or find a community, but also I can totally isolate myself in a belief bubble.

Jim O'Shaughnessy: 23:24

Absolutely correct and that is, in fact, what we are seeing more and more of. And one of the things that I think will happen is and this just might be incredibly wishful thinking, because at our core, genetically, evolutionarily speaking, we are tribal creatures. There's a great quote and there's a lot of benefits to being a tribal creature, right? So there's a great quote. I can't remember who the author was, but it was along the lines of drop a single naked human being into a forest that is ripe with predator animals and you've just given them a lovely meal. Drop 100 humans naked in that forest and you've introduced the new apex predator. And the idea that our ability to coordinate and plan and work together is why we are the apex predator on this planet today.

Many more of the downsides of it, because we do live in these echo chambers and what's funny is we do it voluntarily, because a lot of people this sounds very caustic, and I don't mean it to be caustic, but a lot of people just don't want to think. They would just rather go through their day, try to minimize any kind of discomfort or whatnot. I mean again, don't look at what people say, look at what they do, right, and so what they do is they always are trying to minimize discomfort, minimize controversy, for the most part, unless they're a different personality type, and so you can get lost in these echo chambers. Now there are some ideas that I have about ways of getting out of them. I myself, for example, regularly read things that I know I'm going to disagree with GPT chat. Gpt is really good at writing steel man arguments. So what I do is I find a piece that might be written by somebody who I vehemently disagree with. So, for example, udowski, who wants to launch missile strikes on GPU plants and to me is a comic GPU plants and to me is a comic kind of like a cartoon character. But I'm like, well, let's see what he's got. So I would take a piece from him and others by the way, I don't want to just pick on him and I would put it in to chat GPT and then ask questions and then say, please steal man this art. His argument and I'll tell you I it led to a lot of things that I hadn't really considered so great food for thought made me think okay, maybe he's less of a cartoon character than I think. I still disagree with him, but at least, looking at the strongest version of his argument. And then, of course, I will do it on the EAC side of things. You know that's the effective acceleration movement and you steel man them and you compare the steel mans, then you also do a devil's advocate for each and it's just a great way to try to see. Well, you know what they actually have. A point here that it wouldn't be bad for us to introduce over here, because we're going to probably have to deal with it at some point anyway. So definitely think that there will come online, come into creation, a series of almost training apps for people who are interested.

Tim Urban wrote a pretty good book released last year. I've had him on the podcast a couple of times. He's super smart in the way he thinks about it and he's got kind of the thinking tree and he's very funny right, and so at the bottom of the tree is a monkey and that's like all of us and he's trying to get us up the thought tree where we can actually disagree with people without venom and without rancor. Um, so so I definitely think that things will emerge.

The Overton window is shifting rapidly I'm sure you're aware of that as we look at what's being discussed now versus even six months ago, and and so I tend to look at all of our systems as complex adaptive systems systems, and, as you know, complex adaptive system has emergence from below, not from above. I think it's one of the reasons why, you know, top-down planned economies always fail is because, no, actually your committee isn't the greatest minds in the world. The greatest minds in the world are the human colossus made up of all types of cognitive styles, and that's why I'm so in favor, for example, of open source on AI as opposed to closed source. But yeah, it's going to be. It's going to be a fascinating and probably bumpy five to 10 next years, but I like what comes out on the other side of it.

Sebastian David Lees: 28:46

Absolutely, and you're definitely preaching to the converted with me in terms of bottom up versus versus top-down.

You mentioned open source. It's fascinating If you look at sociologically what happened in the early noughties. I'm a software developer by trade, so I look through the world in that lens. And when you look at what happened in the early noughties, when you saw this open source movement happening and suddenly, versus the 1990s, where it will cost even if you just wanted to buy a code compiler, you might be looking at several hundred dollars, right, and suddenly what you saw in the early noughties was this open source movement where you could build a web facing complicated tech stack for free and what you saw come out of that was essentially Web 2.0. You saw a bunch of college kids and teenagers tinkering with this technology and creating Facebook, et cetera, et cetera. Now I want to change tack slightly here and start talking about OSV and AI a little bit, but jumping the gun. Do you see AI for the generation below us having a similar effect? Open source AI, should I say, with stability AI having a similar effect?

Jim O'Shaughnessy: 29:57

I think so. I think that there's a reason why Linux runs the web. Again, we had mostly Balmer at Microsoft calling it a cancer, and communism and all these things. And again, another neat thing to do is follow the money, and when you follow the money you see why exactly he was making those statements. If I was in his position and of that disposition of mind, I might too, but the superiority comes, in my opinion, from cognitive diversity. There's another great quote, which is no matter how brilliant a person, no matter how switched on, no matter how intelligent, you cannot ask them to create a list of things that would never occur to them.

Sebastian David Lees: 30:45

Kind of the unknown unknowns.

Jim O'Shaughnessy: 30:57

Yeah, but guess what, If we're building the human colossus, well, and I think we are now Kind of the unknown, unknowns that particular enterprise, and that's how I mean Adam Smith, the invisible hand, right, there is a reason why markets work so well and it is because the wisdom of crowds in the correct way, right? People always say, well, wait a minute, wasn't the great book the Madness of Crowds? Well, wait a minute, wasn't the great book the Madness of Crowds? And yeah, but for the wisdom of crowds to be beneficial, you have to have heterogeneous opinions, not homogeneity. You have to have a variety of prizes, if you will, available to all the members of the crowd making their guesses, and you have to have cognitive diversity.

There's a good book by James Surowiecki, which is a bit dated now, but I think the premise is still there. And you know, it's really really quite fascinating. When you have a heterogeneous group of people making predictions on something, the average of that group, if n is large enough, the average of that group is almost always closest to the true value, even closer than the best guess that won the prize.

Sebastian David Lees: 32:19

Yes Right, this is the weight of a cow at the country fair kind of guessing.

Jim O'Shaughnessy: 32:25

Exactly, exactly so. I think that that's what we're seeing at work. In open source, we have so many different points of view being expressed, so many different types of unique ways of looking at solving a problem, and, specifically, neuroatypicals tend to be much better at this than neurotypicals, right? I used to joke that the reason that we have the problems that we have with social media is because all of our social media sites were designed and shipped by neuroatypicals and then they were used by neurotypicals who didn't quite understand. Wait a minute. This person said something I disagree with. I'm going to shout at them.

Sebastian David Lees: 33:13

I think there's a famous webcomic and it's just two panes and the wife is like honey, it's late, come to bed. And he's sat at his desk and he's like I can't, it's like why? It's like there's someone on the internet that's wrong.

Jim O'Shaughnessy: 33:28

Yes, I know that panel well and it's so funny because it's so true. I think that, ultimately, our conceit that we are rational beings is a conceit. I didn't bury the lead, it's a conceit. I think that human OS is driven mostly by emotions, that human OS is driven mostly by emotions and I think that the emotion that is the king of all the other emotions is fear, specifically fear of the unknown, and we see this throughout history. There's a great website called pessimismorg and what they do is they collect all of the headlines from whenever a major innovation happened. And, sure enough, whenever there was a major innovation, you saw how it was going to destroy civilization, it was going to ruin bring Armageddon sooner, and you know, it goes all the way back to Socrates deciding that writing wasn't a good idea.

Sebastian David Lees: 34:25

You see it in the media for time. It fascinates me. For example, you know, you see Mary Shelley's Frankenstein come out around the time that electricity starts becoming. Oh, this electricity can create an inhuman, soulless monster. It seems laughable. Now, you know, you see the modern equivalent of it now, and you do. And you know it's a very human thing, but maybe it's an evolutionary defense mechanism.

You know, there's always this gradient curve of progress that a societal level keeps us from extinction, and I think there's people pulling in one direction which want progress, but progress too fast can cause cataclysmic mistakes. And then there's the traditional people who pull against it and I like to think of it like a soap bubble antaclysmic mistakes. And then there's the traditional people who pull against it and I like to think of it like a soap bubble. You know how they say a soap bubble is held together by surface tension. That's how I see society. It's held together by the surface tension of all these disparaging views and despite all the craziness, it forms, you know, a coherent, beautiful structure forms, you know, a coherent beautiful structure.

Jim O'Shaughnessy: 35:28

Yeah, that's an interesting analogy and I think that by and large, it's correct. I think that happens sometimes, though I'm a huge fan of Professor Deutsch, who's at Oxford or Cambridge. He's at Oxbridge and he wrote the wonderful book the Beginning of Infinity, and he talks about the idea Again for your listeners. If you haven't read it, I urge you to read it, dan. It's a brilliant book. He builds from the foundation level up, which I love, and one of the things that he points out is that the precautionary principle rules often societies where the end result ends up as stasis and death, and that one needs to always be searching for better explanations but to be mindful that we're going to get a lot wrong. It's got.

You know, fableism is essentially the theory that, yeah, we're going to innovate, but a lot of the things that we do are going to be wrong and we're going to have to fix them.

But sort of back to fear and back to the reluctance of big parts of society to embrace change or innovation is the idea that we're all the descendants of the cowards that ran away.

So if we were like on the savannah in Africa and there was a bush rustling, we're the descendants of the folks who booked it in the other direction. Bush rustling, we're the descendants of the folks who booked it in the other direction, not the curious, inquisitive one who goes I wonder what that is, that they get by the lion. So do have, I think, genetically a predisposition to being more cautious than we might otherwise be. Now, obviously you can't optimize for level of caution at least I haven't been able to figure that out but the idea that this is the immediate base reaction makes a lot of sense, right, like we fear the novel. That's why you kind of saw the ability during the pandemic, in normal circumstances, in free countries like the UK, like America etc. Telling people that they couldn't leave their homes would generally lead to open rebellion. But there was a novel fear out there, the COVID virus, and you saw compliance of even libertarian-style societies go way, way up. I think that that was the result essentially of our predisposition to really fearing novel threats.

Sebastian David Lees: 38:21

If I may do a shameless plug here, the previous episode of this we talked at length about the precautionary principle with a nurse who's based in New York during COVID, the lessons learned from that and the publication of Nassim's precautionary principle paper. And you're right, you're absolutely right. In novel circumstances the goalposts shift and what's the counter argument to that, I suppose, is we're talking about the savannah and running away from the tiger. I think we see that in a slightly more meta way these days in conspiracy theories where, yes, maybe 99 of them are, 99.9 of them are, you know, crackpots. But societal level, there's a protective mechanism there, evolution, for the one in a thousand are correct.

Jim O'Shaughnessy: 39:09

So my take on that I think you're absolutely right about the abundance of conspiracy theories, but my view is more along the lines of during chaotic periods, people want things to make sense, and, on the face of it, a lot of things that are happening to just a casual observer don't make sense, and so coherence is very important to remaining sane as a human. If you run into somebody who is decohering, that's not a pretty sight, and so when people see all of these things happening, they absolutely fall into the. It must be some grand conspiracy driven from up here. And you know, conspiracies have a long and storied history, and if you look at some of the big ones, like the Illuminati, etc. You'll find that they coincide, generally speaking, with periods of great change in society.

Now, the changes were different. Right, the movement from the sun king anointed by God to elected officials that was a big move. People failed to consider just how much of a shift in the worldview that caused, and so that gave birth to tons and tons of conspiracy theories, and so I think that it didn't surprise me at all that we would see all of the various conspiracy theories that we're seeing primarily and, by the way, this is apolitical from my view, there are conspiracy theories on the left, there are conspiracy theories on the left, there are conspiracy theories on the right, and I think it is the lowest form, in my opinion, of sensemaking. People are trying to make sense of things that, on the face of them, don't really make sense right that, on the face of them, don't really make sense.

Sebastian David Lees: 41:10

Right. Crack the handle to process the information that they're being deluged with and form a coherent narrative. Exactly.

Jim O'Shaughnessy: 41:17 

And then the challenge with that is now we're back to the thinker prover. People's provers work overtime when they are in one of these conspiracy bubbles and it's a form of a mental prison in my opinion, and you know it's pretty hard to come up with an escape plan if you don't know you're in prison. And so the challenge there is, like have you read Eric Hoffer's True Believer? No, I haven't. Oh, I highly suggest it, you might like it. He wrote it, I think, in the 1950s Interesting man, longshoreman, who turned into this profound philosopher and wrote lots and lots of really great books, the true believer being one of his better ones. But it's this idea that when things are very unsettled and now this is back to our people seeking to coherehere they also seek out like-minded people and as they do that, they create that bubble. Sometimes it's a conspiracy, sometimes it's something innocent, like your, your train set model example from earlier, but but they definitely feel greatly much more comfortable in that environment because there is no dissonance. Right, Everyone is, you're right, jim, you're right, jim, you're right Jim. And that is not a helpful thing if you want to actually see where things might be going. And so definitely think that it's part and parcel to the way we're programmed and, from my way of looking at it, this too shall pass right. One thing to understand is that probably not going to change a true believer's beliefs with facts, believers' beliefs with facts. The only way you can do it is some interesting demonstration, usually through a story or through a different frame of reference, to get them to reconsider what they're doing.

Personally, I don't believe I can change anyone's mind. I believe that I can be a resource, I can be useful, I can be helpful, but I think ultimately everyone has to come to the changes of thought on their own, because, you know, a man convinced against his will will be of the same opinion. Still, and there's a good book that I give out. It's called Power Versus Force and essentially the author is a medical doctor and he makes the point that for most of human history, what's been used is force. No, you will believe this, you will serve this leader. Oh, and if you don't, we'll kill you, and that's a powerful inducement to say okay, count me in. He uses the term power I would have picked a different word, but, semantics aside to mean allowing a space for people to see all of the various ideas and influencing them rather than forcing them, and I subscribe very much to that view.

Sebastian David Lees: 44:31

It's interesting. It goes back to when you talk about human OS and you know thoughts and decisions being emotional-based rather than fact-based. Jim, I want to change tack a little bit now and talk about OSV, assurance Ventures, which is something you set up fairly recently. I heard it described as kind of the third chapter or the third act of your career. Now what I wanted to ask is you know you come from a quantitative background and, from what I can see, a lot of what happens at OSV is related to film and media. How drove that shift and how easy did you find that change?

Jim O'Shaughnessy: 45:09

So I've always kind of been both. I've always loved ideas, books, writing. I'm a huge reader of fiction, nonfiction, and the disconnect for a lot of people who don't know me is like for the first part of my 20s all I did was write up novel ideas and screen treatments. It was something I just loved to do Wall Street or the city for folks who are in the UK and the path that I took led me to the quantitative approach, primarily because I learned early on that this fits kind of beautifully with what we were talking about. People who make decisions usually make them emotionally and that in public markets that was a really bad way to make decisions.

And I had an experience going into the crash of 1987. That was what finally flipped me to being an entire quant, and that was I was using a quantitative system that looked at valuations in the marketplace. It's comically naive by today's standards, but it worked pretty well actually. And it didn't say you know, a crash is going to happen on this day or markets are going to soar, and tell it just said directionally, which way does the market seem to be moving? Is it moving upwards, sideways or down? And when the system said upwards, I would go long calls, which are options to buy the market at a predetermined price that you do very well if it gets well above that predetermined price and when it was pointing downwards, I would go long puts, which means that you get to sell securities at previous prices after they've collapsed.

So I was going into the 1987 crash, which is the largest crash in a single day in the United States, surpassing even the 1929 crash, with the largest put position I had ever held, and I was an emotional wreck and I had brokers calling me saying are you still sitting on it? These things are going to expire. And then I had a friend who I really admired his way of looking at the world, called me and he's like Jim, you got to get out of these puts Today's low, a lot of people don't know. The day before Black Monday was a horrible day in the market, just not nearly as horrible as what happened on Monday. But he called me about a half an hour before close and he goes this is it. It's washed out. You know I bet my bottom dollar on it. You know all the it's my conviction.

I got a feeling all of these things and I sold them all the day before the biggest crash in the United States history in which I would have made a fortune on those puts that I sold, and so I kind of had a review everything I do by writing it out and saying here's where I went right.

Here's where I went wrong, and then I still have the notebook around here somewhere. But it was like I think one of the best ways that I can do well in public markets is to arbitrage human nature. And you know, quant. Back then, like no one really knew what quant was, and in fact most of the research that I did for my first book, invest, like the Best, I had to turn to psychological research. There was no financial behavioral research available at the time and there were academic papers, of course, the most famous from French and Fama, but they were testing like just price to book value, and I became fascinated by the idea that People often get things right but then their emotions get in the way and, for a variety of reasons, derail them. And so I thought well, I think that this idea that if I'm directionally right the majority of the time and if I can withstand the times, I'm wrong, and those are the that try men's souls. You know, your wonderful bard, mr Shakespeare, wrote a couplet when, in disgrace with fortune and men's eyes, I all alone beweep my outcast state, that's kind of what it feels like, and so that's the hard part, right, sticking with it when everyone's calling you. In fact, I might have had more of worst offender of all of these particular things, and so the switchover is perhaps more nuanced.

I'm doing things now that I've always loved but didn't have the ability or bandwidth to focus on when I was running an asset management firm. We still take quantitative views of things, but we marry them with qualitative views in a variety of things in all of our verticals. So the verticals are essentially things that I've always been interested in Early stage investing. We started doing that in 06. Films I've been a film and movie buff since I was a teenager and we now have the tools to be able to make them at vastly reduced costs.

And, by the way, back to the Great Reshuffle, a different business model. Same books I love books and I've published four, and I would talk to more and more authors, both fiction and nonfiction, and they all had exactly the same read as mine. Traditional publishers are horrible. They're horrible and we've allowed this disequilibrium in economics to persist, even though it has no need to. So, for example, infinite Books will be giving 70% of the revenue to the author. 30% will stay with us after we recapture costs. But we'll be doing a lot of things that were pain points for authors and were easily correctable even 10 years ago. Now, my goodness, the tools available are extraordinary. We'll be able to publish books on demand in every language, because the AI can translate it into that particular language.

Sebastian David Lees: 52:42

And not just books. I think I saw you've got live translation of videos into different languages now.

Jim O'Shaughnessy: 52:49

Yes, we do.

Sebastian David Lees: 52:50

Which is incredible, and not just, like you know, these 1970s kung fu movies where it was really bad, like you know, actual lip sync, correct live translation. And it was interesting what you were saying about the physiology and psychological makeup of trading. You've given some great book recommendations so far. I'd like to give one of my own, which is I'm probably going to mess this up the title the Hour Between the Dog and the Wolf.

Jim O'Shaughnessy: 53:14

Oh, that's a great book yeah.

Sebastian David Lees: 53:16

Which talks about the psychology of trade, fantastic book. So would you say there's a difference in skill set between looking for opportunities in the market as a trader or an asset manager, between looking for opportunities in venture capital, or is it the same game?

Jim O'Shaughnessy: 53:37

It is a very different game from my perspective. A more fundamentally oriented investor in public markets probably wouldn't agree with that statement. From the point of view of a quant, they're very, very different. In early stage investing it's basically all about people, literally all about people. And it was wrong. I thought it was going to be all about the idea or all about the market that was not being addressed, etc. Etc.

Sebastian David Lees: 54:11

You've preempted one of my questions. I was going to ask you, was it people versus idea? But that's really good to know.

Jim O'Shaughnessy: 54:17

Yeah, it's definitely not enough to have a great idea. You have to have the team executing against that idea work, because if it doesn't, it doesn't matter how great the idea is, that particular early stage company will probably fail great the idea is that particular early stage company will probably fail. And so that was a big learning for me. One thing that we are doing at OSB on our adventure side and, by the way, we call it adventures, not ventures, because that was one of the original names for venture capital adventure capital.

Sebastian David Lees: 54:51

Oh yeah, like the old people in the Jamaica coffee house in london, kind of adventure capital back in the day. Yeah exactly.

Jim O'Shaughnessy: 54:59

And there's another one that I love even more, um, and it's called liberation capital. Uh, because when really got it started like, people there weren't entrepreneurs in the sense that we have them today. People went to work for big companies and they wanted that secure salary and all of that entails. And so the traitorous eight who left to form what ultimately became Intel the fellow who financed them said no, no, no, no, no. This is your liberation capital, which I love, and so we do use quantitative screens on the idea side, and less so on the people side. There we're relying more. I definitely believe that there is such a thing as saturated or imbued intuition, and by that I mean, if you encounter the same pattern time and time and time again, you begin to sort of notice it much more quickly as it builds over time, and so I'm fascinated by combining these two. I think that a holistic approach which draws both on empirical and non-empirical inputs ultimately offers the best chance at doing well with an investment. Now, you also have to be quite content with the idea that this is a power law game, and you know, you're gonna. You're gonna invest in 20 companies, and 17 of them are gonna do nothing or go bankrupt and three of them are gonna make up for all of your winnings in the portfolio.

Definitely think that people like me are beneficiaries again of if risk-seeking behavior, ie going long volatility. If that were normally distributed, there would be no Elon Musk, there would be no Bezos, there would be none of these founders who've done so. Very, very well. It isn't normally distributed.

I think that maybe 90% of the population wants to be short vol. They'll sell vol and the key here is they're selling it way too cheaply and so you get guys like me who love vol. We get a bargain basement price on this. Again going back to human OS, because your average person hates volatility. They love certainty, they love insurance. Well, the way I look at the world, I can be certain about one thing, and even that one I'm not so certain about anymore. That's debt. Right, everything else is a probability to me, and I think that this desire for the illusion of certainty is what drives that willingness to sell vol for way below what they should be selling it for selling this to sell vol for way below what they should be selling it, for there's a classic example of human OS observation.

Oh, okay, I see why I get to get all of these deals at prices that I think are reasonable.

Sebastian David Lees: 59:00

It's because I have a super high tolerance for variability, and there's that evolutionary aspect. Again, going back to running away from the bush uh, from from the shadow versus the tiger and the soap bubble analogy we need both types of people, I think, to maintain that gradient of growth. So, jim, we're coming up, I know you for about 15 more minutes and I like to do is hand over to the fat toners community now and people who have submitted questions for you, knowing this interview is coming up and these are always a little bit chaotic, but we've got a few that have been voted on here and I want to use this time just to ask you the top two so this is the first one is highly linked into what we've just been talked about.

Sebastian David Lees: 59:32

Fat Tony in Nassim Taleb's books famously said the best trades come to you. Have you found this is true?

Jim O'Shaughnessy: 59:46

Used to joke with my friend, Cliff, that it would be far better for us quants to just have numbers, not even tickers, and let the trade come to us. That's exactly almost the definition of what we're doing. We're looking for these characteristics. We don't care what sector it's in, we don't care who the CEO is, we don't care what people's opinions are. It in fact does come to us.

On the venture side, I'm seeing my sample size is probably not big enough to make a coherent and definitive statement. But yeah, some of the best results that we're seeing short term and obviously they could go awry, so let's add that caveat and footnote there. But our situations where the founders literally sought us out, sort of like you are the person that we think really understands what we're trying to achieve here and we would love if you would be invested with us. That's happened more than chance would indicate, and with the results of the companies that did so being in much better positions, at least at this time, and what we're talking to go on to do quite well. So yeah, I guess Fat Tony got that one right.

Sebastian David Lees: 1:01:10

Great. Well, moving on and I think this will be our last question, and again it's from the community If you were somehow forbidden from pursuing wealth, security or freedom, how specifically would you spend your wealth and time and there's a caveat here that he's added With family and with people I love are cop-out answers. I'd like to know Jim's opinion on the best possible end use of wealth and time.

Jim O'Shaughnessy: 1:01:38

Well, they are specifically precluding the best uses of wealth and time. So I suspect that I would spend all of my time and money trying to understand things better, by reading, by writing, by watching, and then I would, in a perfect world, make all of that available to everyone on a website or some other form where everyone could have access to it and they could pick it apart. They could say, yeah, he's totally wrong about this, or I hadn't thought about that aspect of it. So, yeah, if I was precluded from all of the above and I was not given the easy out of hanging out with my family, which I love to do, yeah, I think that's what I would use it for.

Sebastian David Lees: 1:02:39

What's wonderful about that answer is I'm an optimist at heart and I genuinely think things on the whole tend to get better over time and that does seem to be the way society is heading.

Even you know, I grew up in the 90s and if you look at the availability to resource education, you know I was a young geek programming, you know from a young age, but even then the resources were limited. And when I look at what's available now, it is mind blowing to me and I maybe I'm in denial, but even I don't, because I don't consider myself that old, but even compared to my childhood, it's absolutely, absolutely astronomical the information that's available and I I love that. Well, unfortunately, I wish I could talk to you for hours. You're such an amazing erudite guest. You're a phenomenal conversationalist. But you know, before we finish up, jim, you know every book we've referenced, obviously, links to osv and various websites will be will be placed where we distribute this. But is there anything else you wanted to give a shout out to or mention, or something that you were dying to talk about that we haven't had a chance to yet?

Jim O'Shaughnessy: 1:03:44

I guess I'll give a shout out to everyone listening Something very simple, but it really can change and reframe your perspective, and that is don't look for things to root against, look for things to root for. There's so much that's happening in the world right now that, I think, is for the better, and back to evolution. Our natural predilections give us a tinge of pessimism, and so it is not heavy lifting to look for things to root against, but be on the side of people rooting for things, because I think that both changes your perspective and really lets you put better things out into the world.

Sebastian David Lees: 1:04:31

What a fantastic way to end, Jim O'Shaughnessy. Thank you so much. It's been an absolute pleasure.

Jim O'Shaughnessy: 1:04:36

My pleasure as well. Thanks so much.

O'Shaugnessy Ventures (OSV)

Jim's Podcast - Infinite Loops

Host: Sebastian Lees

Music: Tim Hofmann

Voiceover: Brian Roberts