More Fun With Useless Correlations: American Pharoah

June 8, 2015 9:00am by Barry Ritholtz

About a year ago, we discussed what happens “When Correlations Lie.” Delving into the classic logical fallacy that correlation implies causation, we looked at equities and a variety of supposedly related factors, including gross domestic product, rising interest rates, earnings surprises, new financial products and the “death cross” involving daily moving averages. All were classic coincidences of correlations that didn’t have any actual causal effect on subsequent equity performance.

But the issue of a lack of causation doesn’t seem to stop traders from looking for some way to create an actionable trading opportunity. An entire mythology has developed around relationships of dubious causal value between variables.

Let’s look at the relationships between stocks and two variables: Triple Crown winners and regional banks. This came up during the weekend as two of my go-to sources discussed each . . .

Continues here: Triple Crown Winners and False Correlations

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client. References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers Please see disclosures here: https://ritholtzwealth.com/blog-disclosures/

twitter

facebook

What's been said:

Discussions found on the web:

farmera1 commented on Jun 8

BR, maybe this will clarify the causation and correlation issue for you.

http://www.businessinsider.com/triple-crown-winners-stock-performance-2015-6

I think the writing this was serious, or is this an Onion article. Can’t tell which.
- kaleberg commented on Jun 8
  
  Causation versus correlation: http://xkcd.com/552/
  
  ~~~
  
  ADMIN: You are years late!
  
  http://ritholtz.com/2009/03/correlation/
supercorm commented on Jun 8

Have fun …
http://www.tylervigen.com/page?page=1

~~~

ADMIN: That link is in the full BBRG piece
wally commented on Jun 8

Useless correlation? A case in point:
“LEON COOPERMAN: I sent Obama an angry letter and then I got audited by the IRS”
William_H commented on Jun 8

I had a friend in college who showed in a statistics course there was a “correlation” between the degree of “plunge” in Vanna White’s neckline on “Wheel of Fortune” and the following day’s close of the DJIA. He said the prof was not amused.
willid3 commented on Jun 8

out sourcing leads to lower prices?

Posted Under

10 Monday AM Reads

The Sound of an Improving Labor Market

What's been said:

Posted Under

Sign Up for My Newsletter