The Stock Market Correlation Game: Case in Point - Oil

A fun game on a slow Friday afternoon: take the front page headline on Yahoo Finance and perform some desirable action if the headline makes a dubious assumption about causation. Move to the next headline, and repeat. We were going to suggest this as a drinking game, but we didn’t want everyone drunk before the market’s even closed.

Felix Salmon makes this point well. Financial journalists, for whatever reason, constantly report on correlated events (”Today, p occurred after news that q”) with sufficient ambiguity as to leave the reader with the impression that q caused p. As every freshman philosophy student learns (or used to learn, anyway), correlation does not imply causation.

Enough pontification, let’s play…

Oil prices rose sharply Friday on news that a ship under contract to the U.S. Defense Department fired warning shots at two Iranian boats.

Really? Did the Associated Press talk to traders at the NYMEX who were all, “OMG warning shots, buy buy buy!!!” No. Isn’t it just as likely that after yesterday’s heavy selling in the energy sector, some mean reversion was due? Isn’t it also just as likely that oil rose in price for no discrete or knowable reason whatsoever?

The point here is that unless you’ve got a defensible causal chain to report on, it’s sloppy to be casting prepositions all over the place that leave readers with the impression that causality has occurred.

The story goes on to undermine its own headline with an account of how non-unique these saber-rattling sorts of events are. It follows up with the concession that:

On Friday, oil prices were already up before the report on news of a pipeline attack in Nigeria and a looming refinery strike in Scotland...

...and then continues anyway with commentary on one of the perennial bugbears of oil reporting, namely shenanigans in Nigeria.

Sadly, the story does not achieve oil cheerleading nirvana inasmuch as it fails to include a quote from T. Boone Pickens.

Comments

[User 128563]

It is my contention that the media of all types has more to do with the state of the economy than any other factor.

[Norman Lepoff, M.D.]

Good article. Thanks.

[JREwing]

Good article, in deed.

[Ames Tiedeman]

Media hype is real, but so are the problems with the U.S. economy. We are in for a very interesting next 36 months.

[nickgogert]

Headlines sell ads, but are usually more akin to fads.

[Big Paws]

I'm all for a free press; however when I see the irrational behavior of these people driving markets to even more irrationality, I'd rather have the press censored. For example, an oil spill of 10,000 litres which has 0 impact on current demand or supply drives prices up $10/bbl. Why?