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Think tanking

Shakespeare’s Cassius got it about right when he pointed out that “the fault, dear Brutus, is not in our stars but in ourselves”. He might have fine-tuned the remark by adding that the fault is in our thinking – something to ponder as the UK goes into a second, and far more contentious, lockdown. And the great gift of Covid-19 – delivered, admittedly, at a shockingly high price – is that time and again the mayhem it makes illustrates just how messed up our thinking really is.

For investors, to be reminded of this is especially valuable. After all, this is what investors do. We think. We gather facts, we analyse them and then we act. On the one hand, therefore, it is somehow consoling that health-industry experts, making calls on which thousands of lives may depend, cannot dodge the cognitive traps that have ensnared investors through the ages. If these guys, despite their fluency in heuristics and biases, are suckers for phoney thinking, then we poor investors – risking nothing more than a bit of capital here and there – can be forgiven for making the same mistakes.

On the other hand, we’re on the planet to try to do better. So, through the prism of Covid-19, let’s discuss bad thinking and start with black swans; in particular, the black-swan theory proposed by investor-turned-polymath Nassim Nicholas Taleb to explain events that seemingly come out of the blue. We can debate whether or not the pandemic is a true black swan, or just a dirty-grey one. What’s relevant is that all black swans, says Mr Taleb, are subject to rationalisation after the fact so as to make them explicable and predictable.

Investors should know this cognitive error. Not one growth stock can make the transformation to glamour stock, or one glamour stock fall to earth without City analysts queuing up to explain why these things were bound to happen. Equally widely – though with worse consequences – medical experts line up to explain why some countries are having a ‘bad Covid’, while others are having a good one.

Take China. The post-hoc rationalisation goes that China – just the 1.4bn people – has rid itself of Covid-19 by a combination of ruthless lockdown and chillingly efficient testing and tracing on an industrial scale. The results are there for all the world to see. China’s most recent death due to Covid-19 was on 26 September since when the USA has seen over 25,000 deaths attributed to the virus and, in the UK, more than 4,000.

Chances are, however, the logic is running backwards – China has had a good result, so let’s see what it did and that must be the explanation. Perhaps because China’s state apparatus is linked to brutality – at least, in Western eyes – and brutality links to efficiency, then the country’s lockdown plans must have worked brutally well. Simultaneously, the state’s PR machine, always ready to embellish the successes of the glorious people’s republic, is keen to stress the scale of the test-and-trace system.

Against this, we might consider that the brutal bit of the lockdown was mostly confined to Hubei province, whose capital, Wuhan, was where the virus was identified. In, say, Beijing and Shanghai, the lockdown restrictions were much in line with major European cities in the spring. And once restrictions were lifted, they were pretty well gone; no footling interim measures, such as the UK’s ‘rule of six’.

Additionally, despite the reputation of China’s state, we can debate its ability to deliver an efficient solution, especially in healthcare. As Table 1 shows, China remains far from being rich, even if its major cities have the appearance of affluence. Per capita output of about $16,000 (£12,300) is barely more than a third of the UK’s in terms of purchasing power and the proportion of China’s output devoted to healthcare is half the share of a much smaller cake compared with truly rich nations. Combine those factors with a state, particularly at the provincial level, that still devotes much energy to extracting rents and there hardly seems to be the basis for delivering a happy outcome, had the infection started to rage through the rest of the country as it did through Wuhan.

Table 1: The Inputs
 Pop'n density (per km2)Urban concentration (%)*Per capita GDP ($ )*Median age (yrs)Health spending (% GDP)†
United Kingdom2802746,69940.59.6
China1462916,11737.45.2
Germany2321053,81547.111.2
Italy2001942,41345.58.8
Japan3336541,42947.310.9
New Zealand193242,88837.99.2
Norway171963,63339.210.4
South Korea5175042,66141.87.6
Spain932640,88342.78.9
Vietnam290178,04130.55.5
* % of pop'n living in cities of 1m-plus;  GDP – 2019 at purchasing-power parity; † 2017 data. Sources: CIA World Factbook; World Bank

Sure, no one believes China’s Covid-19 stats (though, to various degrees, one could say that about any nation). Yet a happy outcome there almost certainly continues to be. So, why? First, let’s digress. It is one of the great mysteries of the Covid-19 affair how and why Vietnam and Japan have got off so lightly. After all, here are two nations that seemed especially badly placed to suffer – and not just geographically, though both are next door to the virus’s starting point. Both are densely populated with – in Japan’s case – a high concentration in conurbations. Japan’s demographic is really old (especially vulnerable). Vietnam is young (less vulnerable), but poor (more vulnerable).

Yet, as Table 2 shows, both countries have escaped lightly, Vietnam especially. With just 1,157 cases and 35 deaths from a population of 96m, the official data say it has barely been touched. Even Japan, whose data should be better quality, reports only 14 deaths per million people, about a tenth of the total reported by Germany, which is arguably comparable both for affluence and the age of its population.

Table 2: The outcomes
 Cases (per million)Deaths (per million)Case fatality rate (%)GDP growth (%)Latest death toll*Percent of maximum*
United Kingdom14,4256884.8-21.523024
China6535.24.90na
Germany6,0121252.1-11.35624
Italy10,2726336.2-18.016520
Japan797141.7-9.9726
New Zealand31451.6-12.20na
Norway3,640521.4-4.718
South Korea51191.8-1.3115
Spain24,5067523.1-21.512815
Vietnam120.43.02.60na
* 7-day moving average as at 31 Oct; Sources: WHO; Trading Economics  

Similarly – and despite a few scares – South Korea has fared quite well. Meanwhile, its other half on the Korean peninsula has not become the death trap that was feared. Sure, no one outside really knows what is happening in impoverished North Korea, but if the scenes in uptown Pyongyang were apocalyptic, then the news would have seeped out.

I offer no explanations, although it seems plausible that whatever was happening in China could have been happening throughout east Asia. Much more important, we should not work back from the ostensible reasons for China’s success, add in the sophistication of South Korea’s (and Taiwan’s) hi-tech healthcare industry, and assume that what appeared to work in east Asia will work in Europe and North America.

Besides, there are sufficient differences in case numbers and deaths among affluent nations to doubt that any combination of anti-Covid strategies or any background factors – especially in healthcare spending – could assure decent outcomes. Take New Zealand. The notion that the country’s good result stems from its tough lockdown seems farfetched. Ahead of the pandemic, if any nation looked blessed by chance to cope well with an infection that wreaked damage more by its contagiousness than by its virulence then that would have been New Zealand. Not only is it thousands of miles from anywhere with not much through traffic, it is sparsely populated with but one city of metropolitan size, Auckland. But Auckland has less than half the population of greater Birmingham with about half Birmingham’s population density. True, the nation’s affluence and its comparative youth helps. Even so, if viruses were picky about where they go, New Zealand would not be a destination of choice. In a European context, much the same might be said of Norway in comparison with its more cosmopolitan neighbour, Sweden.

The next problem is that phoney thinking among healthcare experts is exacerbated by overconfidence, vanity and dogmatism; faults that should all be well known to investors. Start with overconfidence, which has been researched to death. There is a link between information and the accuracy of forecasts. That said, experts don’t need much information before the accuracy of their assessments reaches a ceiling. After that, give them more information and their confidence in an assessment grows, but accuracy stays the same. In other words, they become overconfident. That’s bad, especially because it breeds vanity followed by dogmatism; bad but not surprising since experts are almost obliged to defend the assessments about which they are so confident. And the more data available, the more readily an expert will find the facts to confirm that what he knew was right all along. Before he knows it, he is trapped in a self-reinforcing loop.

In that context, it may be worrying that Covid-19 is the first pandemic to be submerged by data coming through in real time. Processing it with lots of calculus only fosters the illusion that epidemiologists have the tools to control the virus – if only those annoying voters would let them – and it breeds dogmatism. It is gruesomely fascinating to see ‘scientists’ – mostly epidemiologists – defend positions that, intuitively, they know cannot be defended. The trouble is they have to since they are identified with them in much the way that, say, Neil Woodford had to defend the junk he put into Woodford Patient Capital Trust.

Which group of experts is on the receiving end depends on whether infection rates are rising or falling. Currently, ‘contrarian’ epidemiologists are on the defensive. Just a month ago, three of the best-known contrarians signed the loftily-titled Great Barrington Declaration (actually just named after the New England town where it was launched). Based on the assumption that the cure was worse than the disease, their aim is to allow the virus to spread through the healthy while sheltering the vulnerable; or as Boris Johnson caricatured, to let the virus rip. Now they are busier explaining earlier claims that herd immunity would quickly be achieved, why the virus would quickly be on the way out and why track and trace is largely a waste of time.

Not to worry, as the UK reverts to lockdown there is plenty of data to show that the UK’s ultra-cautious epidemiologists – the ones with the government’s ear – are overstating the fear. Before too long, they may well be back in defensive mode.

All we really know is that this one will run through the winter. While it does, we could wager a fat wad that scientists with reputational skin in the game will rigidly adhere to the views for which they are known. Much like those investors who cling to a washed-out portfolio waiting for happy day when chance will prove them right and the market wrong. The fault is in their thinking. Sad.