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May 31, 2017
I have always been fascinated with the misuse of statistics to tell stories. There is a great blog called Spurious Correlations that I read when I want a good laugh and a reminder that statistics are not always what they seem. Of course, the point of this blog is to remind us one of the most common statistical fallacies – correlation does NOT indicate causation. For example, the blog shows a nearly perfect correlation (99.79%) between US Spending on Science, Space and Technology and Suicides by Hanging, Strangulation, and Suffocation. Clearly, there is no causal effect either direction.
Here we are after a long run-up in stock markets, particularly US Large Stocks, and the “scary charts” are starting to appear again. Anytime you see a chart that looks like this and you start to panic….
Stop, and read this:
“The ‘Scary Chart’ Fallacy”, by Mathematical Investor
“The Unfortunate Rise Of The Misleading ‘Scary Chart’ Comparisons Again” by David Templeton
A simple scaling problem can make things look a lot different from reality. Statistics and charts are easily to manipulate to tell the story you want to tell. As investors, we have to cancel out this noise and remember that our portfolios are structured to achieve positive, long term expected returns. Don’t be fooled by the sensationalism of journalism.