I read a book a while ago that said people with dogs were happier than people without dogs. It also said that people with cats were more educated than people without cats. If you are a dog person, your brain went straight to, "Yes! I am a happy person, but the heck with cat people; I'm educated." If you are a cat person you thought, "I knew I was smarter than those dumb dog people. Plus, I'm just as happy as anyone with a dog!" You can't help it; that's how we're wired!
Our brains perceive this as: dogs cause us to be happy and smart people get cats. That is no doubt what the person who wrote that wanted us to think. But is it true?
Correlation is basically a way to show how two different things move together. You hear this kind of language a lot in statistics. If something is positively correlated it means that when one things tends to happen, another thing tends to happen in the same direction. In economics, the demand for a product or service is positively correlated to the price. For example, the demand for college education is on the rise and so is the cost of college. If something is negatively correlated it means that when one thing tends to happen, another thing tends to happen in the opposite direction. Using economics as an example again, the supply of a product or service is negatively correlated with the price. For example, if a patent expires and more drug companies can supply a drug, the price of that drug tends to go down.
In both of the examples above, college education demand and college costs and patent expiration and drug prices, there is a strong case for a causation element as well. More people wanting college education means colleges can raise their prices. More companies selling a particular drug means that no one company can charge too much because the other companies will win more customers.
Causation means that something causes another thing to happen. Higher demand for college caused higher prices, more drug suppliers caused lower prices. A cue ball hitting an 8 ball causes the 8 ball to move.
Correlation ≠ Causation
Correlation and causation are not the same thing. If there is a cause and effect relationship, then those two things are correlated. But that doesn't always work in reverse. Just because there is a correlation does not mean that one caused the other. For example, if A and B are correlated, it doesn't mean that A caused B. It could be that B caused A, or there was a third variable, C, that caused both. Then again, it could be completely random with no connection.
For example, there is a positive correlation between the number of ice cream cones consumed (A) and swimming pool drowning deaths (B). I don't think anyone would think eating ice cream causes people to drown. It just so happens that both ice cream cone consumption and people going swimming tend to happen more in the summer months (C).
Here are some examples of things that are correlated but you would be hard-pressed to convince me there is a causal relationship.
There is a positive correlation between:
per capita cheese consumption and the number of people who died by getting tangled in their bedsheets
per capita margarine consumption and the divorce rate in Maine
revenue generated by arcades and the number of computer science Ph.D.s awarded in the U.S.
per capital chicken consumption and total U.S. crude oil imports
So just because something is correlated means nothing about whether or not there is causation. But, it's very easy for us to hear, "people with dogs tend to be happier" and think "people without dogs are not happy."
So maybe cats make us smarter. Maybe educated people get cats. Or maybe educated people tend to have higher demanding careers and thus need a pet that is more independent.
Maybe dogs make us happy. Maybe happy people get dogs. Or maybe people with dogs have to walk their dogs and thus end up going outside more, getting more exposure to the sun and vitamin D - and the vitamin D makes us happy.
If you watch any investing news you will often hear "the Dow is up on news that _____," or "______ caused panic in the stock markets today." Those kinds of reports are just not true. There are so many factors that go into the prices of securities. To say that all stocks rose or fell because of one event is very misleading.
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