Causation & Correlation: Gasoline vs. Incumbency

Friday, October 15, 2004 | 12:03 PM

With the debates now behind us, investors can expect to hear a spate of “suspect” theories from political analysts assessing each candidate’s chances for electoral victory. Most of these will be rife with illogical, poorly reasoned, partisan rhetoric. Voters can do what they want, but we strongly advise investors to ignore them.

For any hypothesis to be logically persuasive, it must demonstrate two key principles: Correlation & Causation. Correlation is a threshold question referring to a verifiable relationship between two elements. Once correlation is shown, the logician’s next task is to establish causation, which we define as the responsibility of a source factor for a related consequence. Only when a theorist can conclusively demonstrate both of these elements, do we believe their analysis is worth an investor’s time, attention and capital.

This election year has been rife with numerous unpersuasive theories. We previously dismissed the claim that equity performance corresponds to the challenger’s polling numbers. That thesis ultimately failed due to causation problems. During the most correlated period (March 2004), the same underlying factors that dragged down the incumbent’s approval ratings (Abu Ghraib scandal, Iraqi insurgency) also spooked investors. These external factors impacted both the election race and the market. While observers noticed the correlation, they incorrectly assumed causation existed also. They were incorrect.

Consider the more recent obsession over the Political Futures Exchanges. We find it foolhardy to rely upon these lagging indicators, as they are minute in size and lack a compelling reason to believe they have any forecasting value. In our opinion, it is roughly the equivalent of predicting the future of the U.S. economy based upon a few bulletin-board micro-cap stocks.

Elections are too complex, and exhibit too much randomness, to rely upon flawed theories lacking in causation. However, we do not wish to leave readers without a methodology for handicapping the campaign. We therefore draw your attention to the chart nearby showing both correlation between gas prices and incumbent approval ratings. Strong causation also exists: Every voting age driver feels the weekly bite of higher fuel prices. This is not a theoretical abstract (such as the Federal deficit), or an emotionally vague notion (which candidate to have a beer with?). Rather, it is visceral, negative and immediate.

As gasoline prices go, so go the challenger’s chances.

Friday, October 15, 2004 | 12:03 PM | Permalink | Comments (0) | TrackBack (2) add to | digg digg this! | technorati add to technorati | email email this post



TrackBack URL for this entry:

Listed below are links to weblogs that reference Causation & Correlation: Gasoline vs. Incumbency:

» Causation & Correlation: Gasoline vs. Incumbency from BOPnews
With the debates now behind us, voters (and investors) can expect to hear a spate of “suspect” theories from political analysts assessing each candidate’s chances for electoral victory. Most of these will be rife with illogical, poorly reasoned, partis... [Read More]

Tracked on Oct 15, 2004 12:21:31 PM

» Carnival of the Capitalists Anniversary, Part 2 from Accidental Verbosity
A year ago, Carnival of the Capitalists was one of the foremost things on my mind. Today, CotC takes second place, at least, as I have a "distraction" I [Read More]

Tracked on Oct 18, 2004 5:55:03 AM


The comments to this entry are closed.

Recent Posts

December 2008
Sun Mon Tue Wed Thu Fri Sat
  1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31      


Complete Archives List



Category Cloud

On the Nightstand

On the Nightstand

 Subscribe in a reader

Get The Big Picture!
Enter your email address:

Read our privacy policy

Essays & Effluvia

The Apprenticed Investor

Apprenticed Investor

About Me

About Me
email me

Favorite Posts

Tools and Feeds

AddThis Social Bookmark Button

Add to Google Reader or Homepage

Subscribe to The Big Picture

Powered by FeedBurner

Add to Technorati Favorites


My Wishlist

Worth Perusing

Worth Perusing

mp3s Spinning

MP3s Spinning

My Photo



Odds & Ends

Site by Moxie Design Studios™