Unfortunately, this is actually a true story, though we’ve changed the details—including
the name of the firm—to protect our friends. We return, in the appendix, to a related story
Think of causation as
cause to effect.
Causation occurs when one thing
directly affects another through a
cause-and-effect relationship.
A correlation means that there is
a mutual relationship between two
things.
A variable is a factor that is likely to
change or vary.
Positive correlation implies that two
variables tend to move in the same
direction.
Negative correlation implies
that two variables tend to move
in opposite directions. When the
variables have movements that are
not related, we say that the variables
have zero correlation.
An omitted variable is something
that has been left out of a study
that, if included, would explain why
two variables that are in the study
are correlated.
Reverse causality occurs when we
mix up the direction of cause and
effect.
M02_ACEM0635_01_GE_CH02.indd 59
2.1
where the CEO was not as sharp as the CEO in this story.
Causation versus Correlation 2.2
People often mistake causation for correlation. Causation occurs
when one thing directly affects another. You can think of it as the
the path from path from cause to effect: putting a snowball in a hot oven causes 2.3
it to melt.
Correlation means that there is a mutual relationship between
two things—as one thing changes, the other changes as well.
There is some kind of connection. It might be cause and effect,
but correlation can also arise when causation is not present. For example, as it turns out stu-
dents who take music courses in high school score better on their SATs than students who
do not take music courses in high school. Some educators have argued that this relationship
is causal: more music courses cause higher SAT scores.
Yet, before you buy a clarinet for your younger sibling, you should know that research-
ers have shown that students who already would have scored high on their SATs are more
likely to also have enrolled in music classes. There is something else—being a good
student—that causes high SAT scores and enrollment in music. SAT scores and taking
music courses are only correlated; if a trombone player’s arm were broken and she had to
drop out of music class, this would not cause her future SAT scores to fall. When two things
are correlated, it suggests that causation may be possible and that further investigation is
warranted—it’s only the beginning of the story, not the end.
Correlations are divided into three categories: positive correlation, negative corre-
lation, and zero correlation. Economists refer to some factor, like a household’s income,
as a ­variable. Positive correlation implies that two variables tend to move in the same
­direction—for example, surveys reveal that people who have a relatively high income are
more likely to be married than people who have a relatively low income. In this situation
we say that the variables of income and marital status are positively correlated. N ­ egative
­correlation ­implies that the two variables tend to move in opposite directions—for ­example,
people with a high level of education are less likely to be unemployed. In this situation we
say that the variables of education and unemployment are negatively correlated. When two
variables are not related, we say that they have a zero correlation. The number of friends you
have likely has no relation to whether your address is on the odd or even side of the street.
When Correlation Does Not Imply Causality  There are two reasons why we should
not jump to the conclusion that a correlation between two variables implies a particular
causal relationship:
1.
Omitted variables
2.
Reverse causality
An omitted variable is something that has been left out of a study that, if included, would
explain why two variables are correlated. Recall that the amount of red content in Walmart’s
ads is positively correlated with the growth rate of Walmart’s sales. However, the red color
does not necessarily cause Walmart’s sales to rise. The arrival of the Christmas season
causes Walmart’s ads to be red and the Christmas season also causes Walmart’s month-
over-month sales revenue to rise. The Christmas season is an omitted variable that explains
why red ads tend to occur at around the time that sales tend to rise. (See Exhibit 2.5.)
Is there also an omitted variable that explains why education and income are positively cor-
related? One possible factor might be an individual’s tendency to work hard. What if workahol-
ics tend to thrive in college more than others? Perhaps pulling all-nighters to write term papers
allows them to do well in their courses. Workaholics also tend to earn more money than others
because workaholics tend to stay late on the job and work on weekends. Does workaholism
cause you to earn more and, incidentally, to graduate from college rather than drop out? Or
does staying in college cause you to earn those higher wages? What is cause and what is effect?
Reverse causality is another problem that plagues our efforts to distinguish
correlation and causation. Reverse causality is the situation in which we mix up the
Section 2.2 | Causation and Correlation 59
17/03/15 12:45 PM