Okay, I think I have a fix on this. Suppose we want to test our hypothesis that otherwise comparable firms with high levels of indebtedness cut back on expenditures desired by employees in circumstances where their not-so-indebted cousins would not. (For a further explanation of that hypothesis, review Part I of this discussion from last week.) How do we do it? We'll assume that we haven't found a smoking gun memo in which the company's Treasurer writes to the CEO and says, "we can't afford those darn safety vests any longer. Tell Human Resources to stop buying them so we can make the interest payments!" Assume we're looking at circumstantial evidence. What counts as evidence? What we can't do is simply say: firm X buys safety vests for its employees and is mostly equity financed. Firm Y doesn't and isn't. No matter how many Xs and Ys we find compliant with our hypothesis, we will still have only correlation, not causation. The arrow of...
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One of the Dilbert cartoons that came up on my day-to-day desk calendar recently offers a valuable lesson. Correlation does not imply causation. Usually, the pointy-haired boss plays the stooge in his exchanges with Dilbert, but in this case its the boss who brings the point home. Dilbert tells him, "Studies show that companies with a high level of trust in employees also perform the best." Dilbert is presumably hoping that the boss will infer from this correlation of performance and trust that there is a causative link, and that the boss ought to trust Dilbert more, thereby allowing their common employer to reap the rewards. Instead, the boss acutely responds, "If you ever start performing well, I'll trust you, too." Ah, yes, one of the problems with that sort of causal argument (but only one of them) is that the causal arrow is easily reversed. Good one, boss.
One already venerable theory of why crime rates fell in the 1990s: ROE v. WADE. The theory holds that unwanted children are more likely to become criminals (18 years or so after their unwanted births) than wanted children, and fewer unwanted children were born in the years subsequent to 1973 than in the years before it. This, rates of crime began to decline when they 'should' have. Here is more information on the theory and the evidence invoked to support it. I've recently encountered another view, though. Perhaps the decline was a matter of leaded versus unleaded gasoline. . In the magazine "Mother Jones" in 2013, Kevin Drum made the point that tying the crime rate to lead emissions has the economical virtue of explaining both the rise and the fall. "lead emissions from tailpipes rose steadily from the early '40s through the early '70s," and violent crime rates rose along a dramatically similar curve with a 20 year lag. ROE v. WADE...
I've returned from my travels, so perhaps the postings will seem somewhat fresher for a bit. One of the pre-fab postings you read last week, dear patient reader, involved my three new calendars for 2015. Allow me now to cast my mind back nostalgically at 2014 as it fades into the rear view mirror, and comment on my day-to-day calendar for that year, which involved Dilbert cartoons. On November 27th, this dresser-top calendar illustrated a theme dear to my heart. In the first panel, pointy-haired boss, standing behind Dilbert (who appears to be working on a spreadsheet at his desk) says, "Someone sent me another anonymous email with a link to the article about the world's worst bosses." In the second panel, boss clearly now has Dilbert's attention, and he continues: "I get one of those emails every time I leave your cubicle. Did you think I wouldn't notice the Correlation?" Then he walks away, and we see Wally, in the next cubicle, smilin...