“Correlation does not imply causation” is a phrase you may have heard in an economics or statistics course. Correlation refers to the strength of a relationship between two variables while causation refers to a status or change in one variable leading to a corresponding change or status in another variable.
With the Super Bowl scheduled for this Sunday, many publications have written about the famed “Super Bowl Indicator” or the “Super Bowl Effect” and why investors should cheer for a particular team. The Super Bowl Indicator, unveiled by Leonard Koppett in the 1970s, states that a bull market will occur if the NFC wins the title while a bear market will occur if the AFC wins the championship. Surprisingly, the indicator has proven correct over 70% of the time.
Yet, while the indicator has been rather accurate, it is important to apply the concept of correlation vs. causation to this supposed economic bellwether. The key question to ask is: Does the Super Bowl winner influence the US stock market’s performance over an entire year?
A good, simple example of correlation implying causation would be the relationship between the point differential of a sports team and its winning percentage. We can reason that because teams win games by scoring more points than their opponents, a team which has a higher point differential is more likely to have a higher winning percentage than a team with a lower differential and vice versa.
In juxtaposition, we can’t offer a logical reason for why one NFL conference would cause a bull market and the other would cause a bear market by winning the title game. There is no significant causal relationship between the outcome of the Super Bowl and how well the US stock market performs over an entire year. In fact, at the end of his 1978 column titled “Carrying Statistics to Extremes,” Koppett wrote:
Although some traders may act based upon the correlation and thereby generate a self-fulfilling prophecy in the short-term, it still stands that the Super Bowl Indicator, while entertaining, is useless for projecting the US stock market’s return.
In the end, your investments will do just as well (or poorly) this year regardless of Sunday’s outcome, so enjoy the big game and don’t feel obligated to cheer for the NFC!
Note: This post was first written in January 2014. I am reposting this piece here on my new blog since I think it makes a good point about correlation vs. causation. It's always important to think about numbers with a critical mind.
Cover Photo Credit: Sandro Schuh