Correlation

lite edition

Hello and welcome to another issue of this newsletter. Let’s look at causation and correlation.

This quote is thrown around frequently, “correlation is not causation”.

Today was a busy day, and I’m quite exhausted. I’m hitting the keys on my keyboards with a banging headache.

Is it the stress that caused the headache or exhaustion? If the reason I’m having headaches is stress, then stress is the causing factor. However, if stress is not the reason but rather exhaustion, then we’d say exhaustion is the causing factor.

When two events correlate, they have a relationship, which does not imply a cause-and-effect relationship. Most times, correlations are contributory factors.

For example, what causes the stock to go down?

When there is more outflow than inflow, i.e. more sellers than buyers. ¹

The reason why we’d have that will vary from one period to another.

So let’s say there will be an increase in interest rates, generally stocks go down. When stocks go down, bond yields go up.

Here we don’t say stocks going down is why the bond yields when up. Rather, it is a case of both stock and bonds negatively correlated.²

And since I’m having a hard time writing this newsletter because of my headache? (is this causation or a correlation), I’d have to draw the curtain here, but I’d explain in-depth in the next issue.³

Readings

1. Not the best

2. Incentives: The Most Powerful Force In The World

3. How To Explain Things Real Good (Stanford mini-talk)

1. Assuming each seller and buyer trade the same amount of stocks.

2. same as inversely correlated.

3. I started two different topics, none had that feel, both didn’t make it. A sad case of my writing life today. But I’m glad this was able to make it.