Correlation, cause or consequence?

Correlation, cause or consequence?

If A gets bigger whenever B gets bigger, did A cause B or did B cause A? This correlation is so often misinterpreted that it probably led to the expression "Lies, damned lies and statistics"

Correlation can be positive (both things increase together) or negative (when one goes up, the other goes down) -

Correlation can be positive (both things increase together) or negative (when one goes up, the other goes down) -

Typical positive correlation would be an observation that the more laughter in a family, the better the kids do at school. Conclusion - laugh more with your family and that will improve your kids' marks!

An example of negative correlation would be finding that the more expensive a couple's home, the less likely they are to drink box wine. Conclusion -drink less box wine and you'll end up with a nicer house!

The fact is that just because two things correlate does not mean that one causes the other. In the first case kids from a well adjusted family are likely to do better at school than kids from a disfunctional family. In the second case, the richer the couple are, the more likely they are to live in an expensive house and drink good quality wine, rather than box wine.

In other words, when you find correlation between A and B, either A causes B, B causes A, or they are both caused by C.

Derek Springett, CEO of HArbour & AssociatesNeed help with your Investments?

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