In response to the note about the time lag between infection and deaths, Mark P. pointed me to an old blog post of his that features another example from the business world.
Mark's example comes from money lending. In that world, a key metric is the "charge-off rate". This is defined as the amount of new charge-off (i.e. bad loans) divided by the total amount of outstanding loans. Both numbers are computed as of the current date. What's the problem? Loans don't typically go bad right away. In fact, as Mark outlined, the industry won't even write off loans until it is already, say, 90 days past due.
And yet, investors evaluate lending businesses based on this "charge-off rate". How is this being gamed? Mark explains:
Let's say I book an account that goes delinquent after one year. That was a bad deal for the bank – – it lost money due to that decision – – but for one year, having that account actually lowered the bank's charge-off rate. Eventually, of course, this will catch up with the bank, but the reckoning can be delayed if the bank continues to book these bad accounts at an increasing rate.
I'd add that (a) the decision-maker has earned all his/her bonuses, and may not even be around for the reckoning, (b) the reckoning can be very far off so long as the bank has a pipeline of these risky creditors to lend money to, and (c) in the brave new world of massive corporate bailouts, the reckoning might show up as free money, more bonuses, and a stock price spike.
I'd further add that this practice - apparently having a nickname of "speed boating" - (a) is legal and (b) violates no accounting rules.
Of course, the whole mess can be avoided if the investors focus on cohort-adjusted charge-off rates. Computing the adjustment does require better data management.
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Business executives are extremely good at crunching numbers. They may not know statistical theories, but they figure out what metrics investors are concerned about, and how to dress those numbers up. The U.S. President is a business exeuctive. He wasn't joking and he is not wrong when he said Covid-19 cases go up with more testing. (Don't forget deaths go up with more testing, too. And it's not how many you test but who you test that is the key to understanding those numbers.)
How do deaths go up with more testing?
Posted by: Antonio Rinaldi | 08/14/2020 at 03:23 AM
AR: Deaths like cases are confirmed by a positive coronavirus test. No test, no confirmed Covid death. This is why in most countries, Covid deaths are not sufficient to explain all excess deaths. (Also, recall the nursing homes in the UK and US that were forced to take sick patients and not to test them.)
Posted by: Kaiser | 08/17/2020 at 02:52 AM
So it is not death itself, but death attribution that is affected by testing.
Posted by: Bill Seely | 09/01/2020 at 10:19 PM