Correlation does not Prove Causation!

Friday 2 September 2011 - Filed under Practical Money Advice

Correlation does not prove causation. This is an ancient saying. In lay man terms it means that just because two things occur in a similar fashion it doesn’t mean they come from the same root cause.

Forgetting that correlation does not prove causation is very dangerous as it causes people to live in an artificial reality to a greater degree than that which is necessary. When one thinks that there is a strong relationship (causation) between two items but the reality is only one of similar appearances (causation) then one begins to base their actions on a relationship (causation) which doesn’t exist. Every person lives in their own perception of existence and when there is a great divergence between that which exists and that which is then the results can be traumatic. The process of making massive readjustment of one’s perception of reality in a short amount of time can be earth shattering for any individual and have resulted in a great many mental break downs. In the name of brevity and simplicity people love to try and use the easiest explication which comes to them.

In an economic sense the readjustment process (of perception of reality -> a clearer view of reality) can be seen with strong and sudden repricing of assets (ie stock market crash). In a personal finance sense the readjustment process can be seen people who drive themselves into obscene amounts of debt and then are suddenly forced to move (ie readjust ) to a discarded IKEA container in the Swedish tundra (or a secluded area in Bangkok) to escape their creditors.

It is necessary and healthy that we try and live in reality. Just because two things appear to be correlated it doesn’t mean that we should assume as such. Just because that homeless guy on your way to work winks at you every day just like your boyfriend does, that doesn’t mean that both think that you’re sexy (1 of them may just want money and the other may want romance; (though we don’t know which is which ).

2011-09-02  »  Juan