Latest news with #JasonZweig
Business Times
22-07-2025
- Business
- Business Times
Buyer beware: 7 red flags signal a reckoning in private markets
PRIVATE markets have entered what may be the most precarious phase of a decades-long speculative cycle – defined by questionable valuations, governance concerns and aggressive marketing to retail investors. While institutions have already committed trillions of dollars to these opaque vehicles, many are now quietly heading for the exits – just as individual investors are being drawn in by the promise of stable returns and enhanced diversification. The warning signs are piling up. Consider, for example Wall Street Journal columnist Jason Zweig's June article, which raised serious questions about valuation practices at Hamilton Lane Private Assets Fund. Zweig revealed Hamilton Lane's use of a valuation methodology that enabled the fund to record generous mark-ups on secondary investments – often within days of purchasing them. According to the article, the fund recorded significant markups shortly after acquiring positions. Such a move, while not unheard of in private markets, may result in perceptions of artificially boosted returns. While the Hamilton Lane Private Assets Fund targets individual investors, the underlying valuation and incentive dynamics mirror those seen across segments of the institutional private markets landscape. Signs of late-stage speculation: Seven red flags How did this happen? Private markets – which include investments such as venture capital, buyouts, real estate, hedge funds and private credit – were all the rage among institutional investors over the past two decades. But today, seven red flags strongly suggest that private markets are in the late stage of a classic speculative cycle. At best, this means they are severely overvalued; at worst, it means that at least some segments may qualify as a bubble. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Red flag #1: Widespread acceptance of a flawed narrative In the late 1990s, Americans believed that any company with a '.com' suffix offered a sure path to riches. In the early 2000s, Americans believed that real estate prices would never decline on a national level. In the 2020s, it seems almost every institutional and individual investor believes that private markets offer a foolproof way to enhance returns and/or reduce portfolio risk. Few question the validity of this narrative despite mounting evidence that not only is it unlikely to be true in the future, but there is also strong evidence that it failed to materialise in the past. Red flag #2: Presence of a complacent and siloed supply chain The real estate bubble in the early 2000s that led to the global financial crisis was extremely difficult to detect because it was visible only to a small handful of people who understood every segment of the real estate and mortgage-backed security supply chain. Back then, individuals with no real estate experience were using massive amounts of debt to indiscriminately buy properties with the sole intention of flipping them for a quick profit. Mortgage lenders were motivated only by sales volume, which led them to issue loans with little regard for the borrower's ability to pay. Investment banks purchased and repackaged these loans into risky products that were nevertheless rated triple-A. Finally, lax ratings agencies, specialised insurers, government-sponsored enterprises and the financial media reinforced the faulty narrative, giving speculators a false sense of security. On the surface, the current supply chain in private markets looks quite different, but it is similar in the sense that each segment adds incremental risk. Few investors appreciate how these risks compound as products move along the assembly line. Moreover, participants in the supply chain are so hyper-focused on extracting value from their segment that they have little care for the risks embedded in the products that pop out at the end. Rather than focusing solely on the end-recipients of capital flows, however, attention should be directed further upstream towards the mechanisms and decision-makers that enable such behaviours to persist unchecked. This is why I believe a critical, yet often under-examined, link in the private markets supply chain lies with investment consulting firms and investment plan staff. For more than two decades, many have encouraged trustees to steadily increase private markets allocations, often beyond what long-term objectives or market conditions justify. In some cases, these recommendations have relied on optimistic return assumptions, cursory due diligence and incentive structures that may not align with beneficiaries' long-term interests. Importantly, these entities tend to operate with limited regulatory oversight. Red flag #3: Large, indiscriminate capital inflows When attractive investment opportunities are scarce, prices of sound investments rise to unattractive levels. This compels fund managers to allocate the excess to unworthy investments and/or outright frauds. Eventually, a critical mass of investors awakes to this reality; capital flows reverse; and the speculative cycle ends with a crash. The flood of capital into private markets has persisted for more than two decades. It began soon after the late chief investment officer of the Yale Investments Office, David Swensen, published Pioneering Portfolio Management in 2000. Followers assumed they could improve their performance by bluntly allocating to alternative asset classes. Few paused to consider the fact that Swensen was both uniquely talented and early to enter these markets. Replicating his performance was never likely for the masses. Red flag #4: Unbalanced media coverage Today, mainstream financial coverage tends to emphasise the accessibility and growth potential of private markets, often with limited scrutiny of valuation practices or systemic risks. This consensus-driven approach can reinforce overly optimistic narratives and accelerate momentum in late-stage speculative cycles. This phenomenon is common in financial history. Red flag #5: Stealthy flight of smart money On Jun 5, 2025, Bloomberg reported that the Yale Investment Office was nearing a deal to close a sale of US$2.5 billion of its venture capital portfolio. While it is possible that recent funding changes for Ivy League institutions played a role, the scale and timing of Yale's potential sale suggest that other factors such as liquidity management or a re-assessment of valuations may be the more significant drivers. The Yale Investments Office is widely regarded as one of the more astute investors, which makes it plausible that their proposed sale of private equity is a dash for the exit. Red flag #6: Aggressive sales to retail investors Starting in the early 1900s, it became common for speculative cycles to end after Wall Street firms exhausted the funds of the last and most vulnerable cohort of capital providers – retail investors. The most common vehicle used to extract capital from retail investors has been the investment company, now more commonly referred to as a mutual fund or 40-Act fund. Over the past 25 years, private markets were largely reserved for institutional investment plans and ultra-high-net-worth investors. But as is always the case in speculative cycles, overly enthusiastic investors eventually flooded the market with excess capital. The classic cycle of overbuilding and malinvestment ensued. Now, over-allocated institutional investment plans and private fund managers are desperately seeking exits, which helps explain their sudden interest in bringing private markets to retail investors. Once again, a vehicle of choice is the 40-Act fund. Heavy marketing to retail investors has led to massive inflows into evergreen funds with fancy names, such as interval funds and continuation funds. Red flag #7: Sudden loss of confidence in the narrative Speculative cycles end when a critical mass of investors suddenly lose faith in the flawed narrative on which it was based. In this context, Zweig's article may serve as a valuable warning. Whether the valuations represent isolated practices or broader systemic issues remains to be seen. But the questions raised deserve a closer look by all participants in the capital markets ecosystem. The place to stop the trouble Researching the 235-year financial history of the United States trained me to never ignore the red flags that typically signal the approaching end of a speculative cycle. In 2025, it remains unclear whether the surge of capital into private markets constitutes a full-blown bubble, but the accumulation of red flags strongly suggests that extreme caution is warranted. The sheer volume of capital – combined with extraordinarily high fee structures relative to traditional asset classes – may significantly impair future returns. In this context, the cost of staying on the sidelines seems to pale in comparison to the risks of participation. Retail investors should approach these increasingly accessible vehicles with a clear understanding of their true purpose and risks. It seems highly likely that, in general, these vehicles are viewed as acceptable exit routes for institutional investors but are likely to constitute unattractive entry points for retail investors. This is not a scenario that investors should take lightly if advisers present them with opportunities to enter these markets. The writer is a senior vice-president for IFA Institutional where he specialises in providing advisory services to institutional plans, such as endowments, foundations, pension plans and various corporate plans. This column has been adapted from an article that first appeared in Enterprising Investor at
Business Times
15-07-2025
- Business
- Business Times
Investment myths in a fast-moving stock market
[SINGAPORE] Welcome to the most volatile decade in recent memory – and we're not even halfway through. The 2020s have already recorded 440 trading days with daily stock movements of 1 per cent or more, according to wealth manager Ben Carlson. To put that in perspective, an entire decade typically averages just 507 such days. Said another way, the 2020s have crammed nearly 10 years of stock market volatility into less than five years – an unusually heavy dose of ups and downs. So, if you feel the stock market is moving faster, you now know why. When volatility teaches the wrong lessons When markets are volatile, the common advice is to simply tune out the noise, but that's easier said than done. The problem lies in the way our brain processes information. In the book Your Money and Your Brain, author Jason Zweig said our brains are wired to recognise patterns even when none exist. Here's the rub: It's not a mechanism you can switch off at will. In other words, by watching daily stock price movements, you may be receiving the wrong signals and end up learning the wrong lessons. That's a big problem as key misconceptions may start to take shape. Take the sudden rise of China's DeepSeek AI model back in January. When the news broke, AI-related stocks were hammered, with Nvidia bearing the brunt, suffering a 17 per cent fall in a single day. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up Such a sequence suggests you need to react fast to avoid such a mishap. Furthermore, it also implies the need to instantly assess new developments and act to prevent further losses. But that's not how it played out. In both cases, investors were misled into thinking that speed is the difference between making and losing money. The misguided need for speed In the hours and days after DeepSeek became mainstream, the narrative quickly centred around the Chinese AI model's development cost – under US$6 million. Why was this figure important? This low expense stood in contrast to the billions of dollars US companies were pouring into artificial intelligence (AI) models and data centres, with Nvidia taking the lion's share. Hence, the prevailing narrative suggested that the company would have the most to lose. Yet, six months later, it's becoming clear that the hasty assessment on DeepSeek is premature in more ways than one. One, DeepSeek's US$6 million development cost does not cover any prior research and experiment on data, architectures and algorithms. The actual cost is higher but unknown, effectively knocking out the main narrative. Two, major tech companies such as Alphabet, Amazon, Meta Platforms and Microsoft have continued to pour billions into data centres. More importantly, much of this spending has flowed to Nvidia. For the past two quarters, the GPU provider reported revenue gains of 78 per cent and 69 per cent year on year, respectively. To top it off, Nvidia shares have risen by 39 per cent from their January low. In other words, those who were looking to save a few dollars by exiting fast ended up leaving a lot more money on the table. Simply waiting for a couple of quarters would have done the trick. Avoiding the pitfalls of volatile markets But if moving fast is not the answer, then what should investors do instead? In my mind, there are three useful guidelines to follow. For starters, most major declines are accompanied by negative headlines. To be clear, it's not about the bad news itself. The real problem lies in the avalanche of negativity that follows, ranging from detailed articles on what went wrong to podcasts and rapid-fire social media takes. Amid the onslaught, any good news is buried and often left unmentioned. This predicament is best exemplified when Netflix lost a million subscribers in H1 2022. In the aftermath, the negative news was unrelenting, with many pointing to the crowded field of competitors and the lack of quality content. Impatient investors reacted by dumping Netflix shares, sending the stock down by 75 per cent from its 2021 peak. But here's the truth: If you believe that you shouldn't fall in love with a stock, then you should also accept that you shouldn't fall into hate with a stock. Amid the pessimism, the naysayers overlooked the positives. In particular, Netflix had a dual strategy in place to launch an ad-supported plan while cracking down on password sharing. Within six months, its new ad-supported option was launched. By the end of 2024, the company's subscriptions surpassed 300 million users, adding over 80 million new members since losing a million in H1 2022. In fact, if you zoom out and look at the loss of subscribers between January and June 2022, it would look like a minor blip in the upward trend. The lesson here is clear. When everyone is eager to tell you the bad news, you have to look for the good news yourself. Let time be the ultimate judge Not every piece of news is worthy of your attention, even when everyone's talking about it. So, here's the next thing to keep in mind: There's a limit to what you can focus on, so don't give your attention away cheaply. The current developments in the AI space are a good example. When OpenAI's ChatGPT caught fire in late 2022, the reactions went on overdrive, prophesying on the future outcomes. The problem, however, is that the outcomes suggested often veer towards the extreme. For instance, some commenters predicted the demise of Google search. The situation is further exacerbated by Microsoft's launch of an AI-powered search. When faced with such a dilemma, remember this: Let time be the judge. In my experience, disruptions do not happen immediately. In addition, there is always time for the incumbent to respond. Furthermore, the AI landscape could also play out in ways we cannot imagine ahead of time. OpenAI's recent deal with Google Cloud services is a good example. This outcome shows there can be more than one winner. You simply have to be patient and let time be the judge. Get smart: There's always time to add a winner Much of the rush to act is based on the fear of missing out, that if you don't invest now, you are sure to miss out on a huge winner in the future. Nothing could be further from the truth. For instance, you could miss the iPhone's launch by a decade and still net a nearly 470 per cent return by investing in Apple 10 years later. Sure, the gain wouldn't be as good as investing at the time of the introduction of the iPhone. But have you seen an unhappy investor with a 4.7x gain? To summarise, as the stock market fluctuates, don't let your emotions flutter along with the ride. Instead, keep these principles in mind: It's not about giving your attention to every single bit of news, it's about figuring out which new development is worth your time. It's not about how fast you react to a new business development, it's about whether or not these developments have a lasting impact. It's not about whether you have a strong opinion on technological trends but whether you can validate these trends at the business level over a long period of time. Simply said, let time do its work. The writer owns all the stocks mentioned. He is co-founder of The Smart Investor, a website that aims to help people to invest smartly by providing investor education, stock commentary and market coverage
Wall Street Journal
06-06-2025
- Business
- Wall Street Journal
How to Get Off the Investing Sidelines - Your Money Briefing
A turbulent spring in the stock market spooked some investors — and now, they're struggling to get back in . Host Julia Carpenter talks with WSJ's The Intelligent Investor columnist Jason Zweig about how these same folks can reshape their investing strategy with some much-needed historical perspective. Full Transcript This transcript was prepared by a transcription service. This version may not be in its final form and may be updated. Julia Carpenter: Here's Your Money Briefing for Friday, June 6th. I'm Julia Carpenter for The Wall Street Journal. What do you think the opposite of FOMO or the fear of missing out is? FOGI. The fear of getting in, and FOGI is all too common among investors these days. Jason Zweig: When people sense a high level of uncertainty in the market, it makes these kinds of decisions more complicated, because often, people are making these judgments partly based on what their peers are doing. And if all your peers are doing is expressing confusion and watching the headlines nonstop, it can be hard to figure out what to do. Julia Carpenter: After such an up and down few months in the stock market, spooked investors know they're probably playing it a little too safe, but what's the first step to jumping back in the fray? We'll talk with WSJ's The Intelligent Investor columnist, Jason Zweig, about how to conquer FOGI and maybe even how to use it to your advantage. That's after the break. Investors haven't had a quiet 2025. After the Trump Administration's tariff plan sent the market into a tailspin earlier this spring, some investors decided to pull out rather than play ball, and others had taken a step back even earlier. But now the market seas have calmed. So how do you get back in? Wall Street Journal's The Intelligent Investor columnist, Jason Zweig, joins me to talk more. Jason, one of your readers, Michael McCowin, wrote to you and coined this new term: FOGI. Or fear of getting in. How did he arrive at this FOGI place? Jason Zweig: Well, he would say a couple of things. First of all, he got old, and he became a FOGI, an old FOGI. And secondly, he has pretty strong views. He's fortunate. He's a former professional investor. He has plenty of assets to see him through. He's 86, and he feels that the potential upside from staying in the market at this point is not as great as the potential downside of staying in and perhaps losing a lot of his money without time to recover. Julia Carpenter: And after such a turbulent period in markets, you talk to some investors who say they think they should be more fully invested, but they still are in that place that Michael is in, that sort of FOGI place. Why do you think so many investors feel this way? Jason Zweig: Uncertainty is always high except at total market turning points, like say, 2020 or in 1987. And when people sense a high level of uncertainty in the market, it makes these kinds of decisions more complicated, because often, people are making these judgments partly based on what their peers are doing. And if all your peers are doing is expressing confusion and watching the headlines non-stop, it can be hard to figure out what to do. Julia Carpenter: FOGI is contagious. Jason Zweig: Yeah, it absolutely is. Julia Carpenter: And your column, which is linked in our show notes, does such a great job of giving us some much-needed historical perspective. How do the last few market cycles fit into the big picture of the last 80 years in markets? Jason Zweig: The key thing to put in perspective as an investor is that, the long run, tells us unambiguously that you should be rewarded for sticking with U.S. stocks if you can stick with them long enough. We've had over 60 instances of stocks losing 5% or more. We've had a couple dozen corrections where they went down 10 or 20%. And, just in the past few years, we've had two severe bear markets where stocks lost 20% or more. And, over time, the markets have always overcome that and delivered ample returns for people who could stick with it. However, it's not a guarantee. And, ultimately, if you try to force yourself to be the kind of investor you're not, you might end up worse off. People who really feel they need to sleep well at night should listen to that intuition, because if you compel yourself against your own gut to stick with the market during times that look tough, when times that actually feel tough come along, you may get shaken out. So, having a little bit higher allocation to cash or bonds might not be a bad thing for someone who is inclined to get spooked out of the market. Julia Carpenter: I wanted to ask you about a hindsight bias. What is it, and how should we be thinking about it as investors? Jason Zweig: Hindsight bias is a fallacy of human reasoning. It essentially trains us to think, after the fact, that what did happen is what we predicted would happen. And just think about presidential elections, for example. People say things like, "Oh, I knew all along it would be a landslide," or, "I knew all along it would be close." But if you go back and look at what they actually were saying before the election, they weren't saying that. And the advantage of what's just happened, particularly in April and the rebound in May, is that it's so fresh in all of our minds, that it's kind of hard to lie to ourselves. And it gives us a great opportunity to look back and say, "What was I actually saying and thinking? Oh, I was actually saying and thinking this was almost the end of the world, and it's turned out not to be, at least so far. So maybe the lesson I should learn is not to be so certain about my forecasts." Julia Carpenter: So thinking about investors like Michael, what would you tell them to consider as they weigh their options and try to conquer this fear of getting in? Jason Zweig: I like to say, if you must panic, panic slowly, panic gradually. Maybe take one percentage point of your allocation to stocks and reduce that each month. And, within a retirement account, where you don't have immediate tax consequences, you can do that quite easily. And making gradual change, first of all, will make you feel better, because you'll feel you're responding to the thing you're afraid of. But more importantly, it prevents you from overreacting to a fear you feel that ultimately doesn't turn out to be actual. Julia Carpenter: And just to emphasize to those who are still sort of spooked, Jason, managing investments is just one part of an overall financial plan, but it's an important one nonetheless. I wonder what would you say to someone about using the market to build wealth and this sense of security? Jason Zweig: So, the thing to keep in mind is that, while there are no guarantees, and it is not actually true that if you hold stocks long enough you're guaranteed to outperform all other assets, it's a bet about probabilities. It's highly likely that you will do extremely well if you hold stocks for the long term. And the fact that the probability isn't a hundred percent, I don't think should really discourage you from doing it. Just as it can rain on a day when the forecast is 100% sunshine, stocks can disappoint people who hold them for decades at a time, but in the long run, it is a very high probability bet. And putting most of your money in stocks, particularly when you're young and your labor income gives you a hedge against fluctuations in the value of your stock portfolio, is a good idea. It's the best bet for long-term investing, even if it's not quite a certain bet. Julia Carpenter: That's Jason Zweig, columnist for WSJ's: The Intelligent Investor. And that's it for Your Money Briefing. Tomorrow we'll have our weekly markets wrap up, What's News and markets, and then we'll be back on Monday. This episode was produced by Ariana Aspuru. I'm your host, Julia Carpenter. Jessica Fenton and Michael LaValle wrote our theme music. Our supervising producer is Melony Roy. Aisha Al-Muslim is our development producer. Scott Saloway and Chris Zinsli are our deputy editors. And Philana Patterson is The Wall Street Journal's head of news audio. Thanks for listening.
Harvard Business Review
23-05-2025
- Business
- Harvard Business Review
One Simple Way to Get Better at Reading Data
Edwards Deming famously said, 'In God we trust; all others bring data.' As we've evolved from analytics to data science to AI, the world has never been more data driven. And as a leader, you are expected to make sound decisions backed up by data. However, leaders rarely use raw data directly for decision making. Instead, they are likely to be a consumer of statistics calculated by their direct reports to help them make informed decisions. While data are observed, the presenter decides which statistics are relevant in a particular context. Should the average of the data be presented? Should the standard deviation also be presented? Should the complete distribution of the data be presented? Should differences in the raw data, for example sales, or percentage change in market share be presented? What you need to remember is: Statistics are not data; they are descriptions of data. To make smarter decisions, you need to know how to question the statistics or as The Wall Street Journal columnist Jason Zweig recently wrote, 'learning how to talk back to statistics is your first line of defense.' In our experience, we have noticed one particular basic statistical issue—the use of percentages can be used in confusing ways to influence others. The confusion typically resides with the denominator. Like Zweig, when faced with percentages, we are advocating that leaders need to talk back to, that is, question the statistics. One simple but enlightening question to ask is 'What's the denominator?' Let's look at three cases where asking this question could help avoid misinterpretation and confusion. Percentage Versus Absolute Difference A presenter has the choice to provide an absolute or a percentage change. For example, in his article on stock market volatility, Zweig discusses how financial marketers play to your emotions with online headlines like 'DOW PLUNGES BY MORE THAN 1000 POINTS.' He laments the trick of 'hiding the denominator.' This is a classic example of when you need to ask: What's the denominator? Take a look at the equation below. Here, knowing the denominator lets us convert the change in the value of the Dow to a percentage, which is how we typically think about a change in our investments. If the value of the Dow is 40,000, for example, then we can convert to a percentage change by doing the division and multiplying by 100: Now, read that headline again and ask yourself: Is a drop in value of 2.5% a plunge? That is somewhat subjective, but a headline of 'Dow Plunges by 2.5%' does not seem to generate the same sense of urgency. Hence, how we use certain statistics (or not) and verbiage can be persuasive and mislead decision makers. As a leader, it is prudent to ask why the presenter is choosing to provide raw data versus percentages. For example, if a regional sales manager reports that a new retail outlet increased sales by $100,000 this month, knowing what sales were last month is very relevant. If sales last month were $200,000 that's an impressive 50% increase in sales. If sales were $1,000,000, then it is a less impressive increase of 10%. This same persuasive use occurs when only presenting the percentage change. If the regional sales manager reports 'We had a decline in sales in our Manhattan store this past month, but it is only 2%,' it might be good to know the denominator of this percentage. If the Manhattan store is a very high-performing store, 2% might be a lot of revenue. The bottom line is to be fully informed. You should always expect to receive the percentage and the denominator, the relative and the absolute difference. For example, 'Sales increased by 50%, from $200,000 to $300,000.' Another issue we have seen is what we call the past participle problem. Quite simply, if a percentage triples (or doubles) the absolute amount only triples (or doubles) if the denominator is the same in both cases. If your marketing manager says your market share has tripled in the last year, that is likely to be very good news. But it doesn't mean that revenue has tripled over the same period. In fact, it's possible that revenue decreased. Suppose last year's revenue was $50 million and the market revenue was $1 billion. Your market share was 50/1000 = 5%. If the market shrinks dramatically, say to $200 million and your market share this year is $30 million, your market share has tripled from 5% to 30/200, or 15%, but your revenue dropped by $20 million. Always ask, 'What's the denominator?' In this case the market size in the previous year, and the market size in the current year are the relevant denominators. The Biased Denominator Our second case involves a biased denominator, most often associated with percentages from survey responses. Although somewhat dated, in his column on misapplications of statistics, Arnie Barnett provides an excellent example of this case. In the 1980s, Midway Airlines operated a shuttle between Chicago and New York City. On October 20, 1983, an advertisement in the New York Times stated '84% of frequent business travelers to Chicago prefer Midway Metrolink over American, United, and TWA.' Well, what's the denominator here? Presumably, they surveyed frequent business travelers between New York and Chicago to see which airline they preferred. Of course, one could ask, 'How frequent does one have to fly between New York and Chicago to be counted?' The bias in the denominator in this case is even more blatant. In very small print at the bottom of the ad they provide the answer to 'What's the denominator?' It states, 'Survey conducted among Midway Metrolink passengers between LaGuardia and Chicago.' So, apparently, the denominator only included passengers on their flights! As Barnett indicated, the only conclusion you can really draw from this survey is that 16% of their own customers prefer another airline. As a leader, you will likely track metrics like customer satisfaction and employee engagement. Consider an employee engagement survey which results in 80% of the respondents reporting high job satisfaction. You should ask 'What's the denominator?' For example, if the survey was only sent to non-customer-facing employees, the results would likely be biased. With survey results, you will benefit from knowing the percentage of respondents in each category of response and the raw numbers. In the case of voluntary customer satisfaction surveys, there is always the danger of a bias from only receiving extreme responses (extremely satisfied or extremely unsatisfied customers). Knowing the percentage of customers responding versus the number of surveys distributed, that is, the percentage of customers who respond provides some valuable information on how representative the survey statistics might be. The Flipped Conditional In January 2025, the U.S. Surgeon General Vivek Murthy issued an advisory on alcohol consumption and the risk of cancer. The advisory describes evidence of a causal relationship between alcohol consumption and several different types of cancer. For some types of cancers, the evidence suggests that the risk of cancer increases even for low or moderate consumption of alcohol. One of the courses of action recommended was to expand the warning label on alcohol to include the risk of cancer. A rebuttal to the need for expanding labeling on alcohol followed in The Wall Street Journal and illustrates what we call the flipped conditional. An editorial board member questions the data used by Dr. Murthy and then uses the following argument opposing Dr. Murthy's recommendation: 'the report partially attributes only 17% of these estimated deaths to moderate drinking. Of the 609,820 cancer deaths in 2023, this would mean moderate drinking contributed to 3,400 or about 0.6%.' What's the denominator in this argument? The denominator here is the number of cancer deaths (609,820). The 0.006 is the probability of your cancer being attributed to moderate drinking given that you have cancer. The relevant probability to assess the risk of moderately drinking alcohol is the probability of getting cancer given that you moderately drink alcohol. Think of it this way, how many people have cancer is irrelevant to the risk of cancer from moderately drinking alcohol, precisely because a lot of other things can cause cancer. The Surgeon General's Advisory provides estimated risk of cancer based on gender and the amount of alcohol consumed. These are the relevant statistics one needs to answer questions like 'If I am a male who consumes one alcoholic drink per day, what is my risk of developing cancer?' Suppose your marketing team is reporting on how effective their free trial offer has been and states '75% of our customers who purchased our upgraded premium product have used our free trial!' That sounds very impressive. However, this metric is not relevant for determining the effectiveness of the free trial offer. It is using the wrong denominator. To assess the effectiveness of the free trial offer, you don't need the percentage of premium purchases who used the free trial, you need the percentage of free trial users who wind up purchasing the premium product. To illustrate this, let's imagine a simple scenario. Suppose 1,500 customers took the free trial upgrade, 100 customers purchased the new upgrade and of the 100 who purchased the new upgraded product, 75 had used the free trial. That is, the conversion rate was only 5%. We believe it is always a good idea to question the data. When percentages are used, it is imperative that important information is not masked by the statistics. Ask for percentages and absolutes to both be discussed. Clarity comes by asking 'What's the denominator?' If you want to know how effective something is, it needs to be in the denominator.
