05 Oct What an Acupuncturist taught me about Correlation and Causation
At a cocktail reception last week, I ended up chatting with an American lady. Let’s call her Susan.
Susan is an acupuncturist. She practices acupuncture in a neighboring country up north. Now, an American practicing traditional chinese medicine is definitely not a common occurrence, at least in my context. My curiosity was piqued and I asked her how she got down to studying and eventually practicing it.
Susan was happy to share. She has been a clinical psychologist for many years before. She had many patients coming to see her for their problems, including but not limited to alcoholism, drug abuse, depression and so on and so forth. She helped some but many fell by the wayside.
She thought there must be a more concrete way of helping these people other than just listening and giving them advice. With that in mind, Susan went in search of alternative medicine and enrolled herself in acupuncture school. According to her, she had absolutely no idea what acupuncture entails before she started.
School took some years and those were formative times for Susan. She began to understand and appreciate the art of putting needles into the human body. She saw how proper treatment under a skilled practitioner could do wonders to improve the health and spirits of patients. The delicate placement of the needles stimulates the flow of chi to different bodily organs, and these organs perform many secondary, higher degree functions on top of their basic functions.
Acupuncture gets to the root cause of whatever problems an individual may be facing by targeting the organ responsible. Acupuncture allows Susan to really help people and she has truly found her calling.
As we chatted on, she shared how acupuncture could also improve the overall well being of her patients by allowing them to make better decisions. My heart skipped a beat when I heard that.
My Super Hero Power
Now, if I am a super hero with a super power, I would not want the ability to be invisible. Neither do I want to be able to fly, or spin webs, or freeze things, or even read minds. Decision making is the single most underrated skill that an individual could possess. If I can pick my super power, I want nothing but the ability to make the right decisions all the time.
Tell me more, I said to Susan. I could barely contain my excitement. Tell me the secret to good decision making.
It is the liver, Susan let on. The liver is the organ that controls human decision making. A healthy liver allows the person to make better decision. A diseased liver on the other hand, causes the individual to make lousy decisions.
‘If you do not believe me, just look at alcoholics. They have nasty livers and they make decisions to waste their time money and life away on alcohol. But once I treat their liver, their alcoholism goes away and they make better decisions’
Correlation is not Causation
A correlation is how two variables change together, regardless of their actual relationship. Two things could be positively correlated, they increase or decrease in tandem. Or they could be negatively correlated; when one goes up the other goes down. Proving correlation is not difficult. Most of the time it is a matter of data gathering and putting the numbers against each other.
Causation is when one variable causes the other to change. Proving causation is a lot more difficult.
Here is a rather clear cut example of correlation not being causation. If we were to examine the sales of face masks and air purifier, we would have discovered that both of them are positively correlated. When the sales of masks increase, so do air purifiers. Yet few of us would go as far as to say that the sale of one increases because of the other.
We could easily associated a third factor, that being air quality, as a causal factor that causes the increase in both. Hence, correlation is not causation.
Correlations and the Financial Markets.
The human mind is feared to look for cause and effect relationships. We are suckers for patterns. We want to know what causes what and we go out of the way to achieve that within our minds.
The financial market is data driven. Because of the huge amount of data in play, correlations are bound to arise.
Number crunchers have made interesting comparisons between stock market performance and Presidential elections in the US. (The Dow sees its weakest performance in the year after the elections and performs best during election year). They have examined the effect of sporting events such as the FIFA World Cup would have on the financial markets. (The winner is cursed with an underperforming stock market in the following years).
The team winning the Superbowl the US is an accurate forecaster of stock market performance. I quote from the WSJ
For the years following 38 of the 47 Super Bowls, the stock market’s direction has been accurately forecast by the result of the big game. The methodology: The market goes up after a win by an “original” National Football League team–one that traces its history back to before the merger with the American Football League—and goes down when the ex-AFL side wins.
Because of the high level of correlation, it is very tempting to proclaim causation, throw caution to the wind and make investment decisions based on which team wins the Super Bowl, and during election years.
Susan and Good Decision Making
I write about decision making often. I believe good decision making is the hallmark of a good investor. Instead of being number focused, we should concentrate on making good decisions.
Decision making is not something we can learn overnight. It is not difficult but it is also not instant. Once we learn how to make good and avoid the bad decisions, our investment fortunes will definitely increase. (Correlation AND Causation!)
I am not doubting the efficacy of Traditional Chinese Medicine and Acupuncture. I do not know enough to comment. What amuses me is the very huge logical fallacy Susan is making. Does an unhealthy liver cause bad decisions? Or are they merely correlated? Will curing the liver really improve our decision making? I leave you to decide.
These fallacies mess with our minds and trip us up in the decision making process, ironically the very element of our lives Susan claims she is trying to improve.