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  • April 2, 2020
  • Chuck Osborne

Figures Lie and Liars Figure

There are many modern day subjects about which I know very little; infectious diseases would be one of those subjects. When I was a student at Wake Forest University, I was required to take a science even though I was an economics major. Wake Forest, correctly in my opinion, believed that to be educated meant to have a well-rounded base of knowledge in many different fields. I chose to take biology…and I chose poorly. If it were not for lab and my future-doctor fraternity brothers, I would have never made it out alive.

Similarly, I could not fill a thimble with what I know about the climate. Weather is not a huge concern of mine. If I want to know what the weather is, then I stick my head outside. This morning it was more brisk than I expected; I’ll find out about tomorrow when I wake up in the morning.

I say that to let you know my qualification, or lack thereof, when it comes to climate change or COVID-19 predictions. I don’t know a thing about the subject matter. What do I know? I know how to crunch numbers. Today it does not seem to matter what the topic, everyone believes they know how to do what I do – crunch numbers. It does not matter if it is the climate, professional sports, or our current crisis. People are crunching numbers.

My profession has been number crunching for a long time, and those of us who have been around as long as I have understand both the value and the problems with mathematical prediction models. The first thing to realize with models is that whatever answer they give, it is guaranteed to be wrong. This is a given. Real life never follows the model exactly, so being absolutely correct is not even a question. The question is, how wrong is the model? The more one uses mathematical models, the more she thinks in ranges of possibilities and not absolutes.

When we use models to help make decisions at Iron Capital, people’s wellbeing is at stake. If our model is way off, then clients lose money. I don’t mean experience down markets like we have right now, I mean permanent loss. There are consequences in my business to being glaringly wrong. We have built in accountability, yet many others do not seem to have any.

The NBA season is on hold, but several years ago Philadelphia’s team went through a “process” all governed by “analytics” and they started by losing on purpose to get better draft picks. They now have a very talented team mired in a culture of losing. Where is the accountability?

Of course, that is just basketball. The climate is far more important. In 2009, politician John Kerry somewhat famously said that the North Pole would be ice-free in the summer of 2013. I doubt he just made that up, so while I couldn’t find an actual study which predicted this, I’ll give the former senator the benefit of the doubt. If you Google the ice cap, people are now wondering if this will be the year. If the climate keeps changing we may indeed see ice-free summers in the North Pole, but in my business, the word for being wrong by a decade or more is called being unemployed. Where is the accountability?

This leads us to our current crisis. The real coronavirus health crisis, which has led to an economic crisis. This economic crisis, which has been caused by the choice to take the threat of this virus extremely seriously, was led largely by predictions of more than two million people dead globally. Just this past weekend the CDC guidelines for social distancing were extended until the end of April as experts have told the President that as many as 250,000 Americans could die of this virus.

Today, according to Worldometer, there have been 5,145 deaths in the U.S. and 49,249 deaths globally. To get from here to where these experts are projecting, two things have to happen: Far more people must have the virus than is actually being reported, and the mortality rate must stay the same as it is when calculated using just the known cases.

Again, I don’t know very much about this disease, but I do recognize two data assumptions that are in direct opposition to one another. If far more people have the disease than have been counted, this means the mortality rate is lower than has been reported. Last week two Stanford professors estimated that it could be as low as 0.01 percent. If that is even close, then we will not be reaching the 250,000 number.

If the virus is as deadly as the current mortality rates suggest, then we must have a pretty good handle on the numbers of infected…in which case, we are not reaching the 250,000 number. One of these two things can be true but both cannot, and you do not need to be a doctor to understand that.

The so-called Murry model, published by the University of Washington, predicts a range of 38,242 to 162,106 deaths in the United States. I believe that large of a range illustrates how little anyone really knows about what the future holds. What we do know is that we are undertaking a lot of pain, more than 9.8 million newly unemployed in the past two weeks alone, because of these predictions.

If they prove to be wrong, the people and organizations that made them need to be held accountable. At least that is my perspective.

Stay well and stay safe,

Chuck Osborne, CFA

Managing Director