Coincidence, Correlation or Causality!

Every now and then we come across very interesting forwards regarding relationship between events and predictions based on those events. Yesterday, I came across this very funny yet heartwarming prediction. Heartwarming because it was about the Indian Cricket Team and what their performance is going to be, in the ongoing ICC Cricket World cup. This forward was sent to me by one of my friends who work in an IT company in India’s Silicon Valley. IT companies’ intranets have become hotbeds for such discussions, debates and forwards.

The culture of sending forwards has become so endemic among IT professionals that they have come up with a tagline for this habit. And the tagline is ‘Great people talk about ideas, average people talk about things, small people talk about others. But legends never talk, they forward emails.’ To put it in a funny way, IT professionals seem to grossly abuse the idea of free exchange of ideas.

Coming back to the forward on Indian Cricket Team: we have to go back a few years in time. The Year was 1981; the whole of England was in a festive mood and was celebrating the marriage of their Crown Prince Charles Windsor with Diana. The same year English Football Club ‘Liverpool’ was basking under the glory of having been crowned the European Football champions. Also the Australian Cricket Team lost the Ashes Bilateral Cricket series to England. The same year, the head of the world Catholic Churches, the Pope John Paul I passed away. The following year (1982) the Italian National Soccer Team was crowned World Champions by winning the FIFA world cup. You might just be wondering what these discrete pieces of information have to do with the Indian Cricket Team. Well, one year later (1983) the Indian Cricket Team surprised the mighty Caribbean Cricket Team (who were marching towards winning their third successive world cup), the whole cricketing world and themselves by winning the Prudential Cricket world cup. Now for people, who are asking ‘so what’, please continue reading.

The year was 2005. Prince Charles once again got married, this time to Camela Parker Bowles. Liverpool again became European Champions, the invincible Australian Cricket Team lost the Ashes again and Pope John Paul II passed away. A year later in 2006, Italy won the FIFA World cup. Now based on these chains of events and comparing them with the chain of events that took place from 1981 to 1983, IT Forwards’ Pundits and Prediction Gurus are predicting that the Indian Cricket Team will win the ICC world cup. What more, they are even pointing to the fact that like the Italian Soccer team the Indian Cricket Team also wears blue jersey. Not only this, while West Indian Cricket Team was looking forward to winning their third successive world cup in 1983, this year it is the Australian Cricket Team which is looking forward to winning their third successive world cup.

Well, what can one say? The forward goes on to finish that, the next time Prince Charles gets married or plans for a marriage, the Pope should be careful!!! Well, this is a perfect example of how the probability of one event occurring would leave some parties well off and some parties worse off. – Poor Pope!

Will India win the world cup? Being an Indian, I would want this prediction to come true and India to win the world cup. If India wins the world cup, then there would be a perfect correlation (at least theoretically) between each one of these events that took place from 1981 to 1983 and the events that took place/ supposed to take place between 2005 and 2007.

Well now let’s pose the broader question. Do all correlations convey causality? Not necessarily. In the case of this particular example I doubt if a correlation exists between these events in the first place. To be honest it is possible to come up with correlation analysis and find a positive correlation between any unconnected events.

One of the funniest examples about correlation that I can remember is from one of the books that I read on Portfolio Analysis (Stock Market related). The book quotes an example where the Stock Market Pundits were able to find a positive correlation between the U.S. stock market performance and of all things, the length of the American women’s skirts!!! In each of the years in which Mini-skirts were a fashion, the U.S. stock markets performed really well. In each of the years in which long skirts were the fashion, the U.S. stock market dived south. In this case while there was perfect correlation between the two events, we cannot say one led to the other.

The last three decades have seen the U.S. and of late the world Capital markets following a 10-11 year cycle. The U.S. economy went into a recession in 1982. In 1991-92 the U.S. economy once again tanked. In 2001, the whole of world economy went southwards. Now comes the interesting part (at least according to me): The Solar cycle also follows an 11 year cycle. At this point of time the world economy is much more integrated than it was a few decades ago. The majority of world economies are based on agriculture and farming. Now Agriculture and farming are dependent on the sun (and the changes in weather that it causes). Now what I am interested in knowing is that, will there be correlation or better causal relationship between the Solar Cycle and the Capital Markets of the world. Well, will any one of those economist sitting across the globe have an answer to this Multi-Trillion Dollar Question?

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