The Madness of Markets, My Dog, and Nic Cage Murder Mysteries

We always want to know what caused what. “The market went down because… oil! The dollar! China! Politics!” “My dog probably got sick because she… ate grass! Ate trash! Ate homework!” What do both protagonists have in common? They both will refuse to answer if you ask them to explain themselves. At least my dog might wag her tail.

We might ask what caused what, but we’re really looking what was correlated to what. “The market went down and so did (or didn’t)… oil! The dollar! China! Politics!” “My dog probably got sick because she did (or didn’t) eat… grass! Trash! Homework! Anything she shouldn’t have!” Just because two things moved at the same time doesn’t mean one caused the other. The same way my dog eats questionable things and sometimes doesn’t get sick (grapes? Really?), sometimes crazy things happen in markets and nobody seems to care. 

It’s easy to think we have certainty when we really don’t. Did you know that the annual number of people who drowned by falling into a pool correlates with the number of films Nicolas Cage appeared in? Is the act of Nicolas Cage accepting a movie role somehow causing people to drown? How do we know? Did the Russian ruble cause a crisis in oil, or did oil cause a crisis in rubles? How would we know?

When we consider just how many variables there are in any complex system, we should immediately recognize that teasing out perfectly causal relationships is impossible. At best, we can identify some approximate correlations. At worst, we can get caught up in spurious correlations (like the Nicholas Cage example above). As professionals, we separate ourselves by knowing not to ask the dogs or blame Nic Cage.

When we move away from thinking in absolutes and towards thinking in probabilities, we take an important step towards making better decisions. It’s a complicated world out there. It’s fine to look for links and connections, but the more complicated the system, the warier we have to be of getting too convinced anyone can know exactly what is going on. This is why we diversify – to admit that more things can happen than will happen.

For ourselves and our clients, we always want to try to replace “what caused what” and “this caused that” with “we think these two things are related for these reasons.” It’s our job is to help make sense of a confusing world, and call others out for trying to make too much sense of things that just aren’t that easy. Now if only I could keep my dog from eating random stuff…