Correlation: ... Beware
Correlation: ... Beware
... beware
Definition
Var(X+Y) = Var(X) + Var(Y) + 2·Cov(X,Y)
Cov(X , Y)
Corr(X , Y)
StdDev(X) StdDev(Y)
• Strength
– not the slope
• Linear
– misses nonlinearities completely
• Two
– shows only “shadows” of multidimensional relationships
A correlation of +1 would
arise only if all of the
points lined up perfectly.
The pure effect of each variable on its own is only revealed in the most-
complete model.
Tilting at Shadows
(received via email from a former student, all employer references
removed)
“One of the pieces of the research is to identify key attributes that drive
customers to choose a vendor for buying office products.
“The market research guy that we have hired (he is an MBA/PhD from
Wharton) says the following:
“‘I can determine the relative importance of various attributes that drive
overall satisfaction by running a correlation of each one of them against
overall satisfaction score and then ranking them based on the
(correlation) coefficient scores.’
“I am not really certain if we can do that. I would tend to think we should
run a regression to get relative weightage.”
Customer Satisfaction
• Consider overall customer satisfaction (on a 100-point scale)
with a Web-based provider of customized software as the order
leadtime (in days), product acquisition cost, and availability of
online order-tracking (0 = not available, 1 = available) vary.
• Here are the correlations: Correlations with Satisfaction
leadtime -0.766
ol-tracking -0.242
cost 0.097
Regression: Costs
constant Mileage
coefficient 364.476942 19.812076
std error of coef 76.8173302 4.54471998
If you give me a correlation, I’ll
t-ratio 4.7447 4.3594
interpret it by squaring it and
significance 0.0383% 0.0774%
looking at it as a coefficient of beta-weight 0.7706
determination.
standard error of regression 73.8638412
coefficient of determination 59.38%
adjusted coef of determination 56.26%
A Pharmaceutical Ad
Correlation(anxiety,depression) = 0.7
100
90
80
70
60
anxiety
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
depression
So, if your patients have anxiety problems, consider prescribing our antidepressant!
Evaluation
• At most 49% of the variability in patients’
anxiety levels can potentially be explained by
variability in depression levels.
– “potentially” = might actually be explained by
something else which covaries with both.
• The regression provides no evidence that
changing a patient’s depression level will
cause a change in their anxiety level.
Association vs. Causality
• Polio and Ice Cream
• Regression (and correlation) deal only with association
– Example: Greater values for annual mileage are typically associated with
higher annual maintenance costs.
– No matter how “good” the regression statistics look, they will not make
the case that greater mileage causes greater costs.
– If you believe that driving more during the year causes higher costs, then
it’s fine to use regression to estimate the size of the causal effect.
• Evidence supporting causality comes only from controlled
experimentation.
– This is why macroeconomists continue to argue about which aspects of
public policy are the key drivers of economic growth.
– It’s also why the cigarette companies won all the lawsuits filed against
them for several decades.