Spurious Correlation

A spurious correlation is a relationship between two variables that appear to have interdependence or association with each other but actually do not. Spurious correlation is often caused by a third factor that is not apparent at the time of examination.

When two random variables track each other closely on a graph, one suspects correlation. Setting aside "causation," another topic, this observation can lead the reader of the chart to believe that the movement of variable A is linked to the movement in variable B, or vice versa. If this relationship does not stand up to statistical rigor, it is spurious.

It is not too challenging to discover interesting correlations. Many will turn out to be spurious, though. For the male species on Wall Street, two popular spurious correlations involve women and sports. Originating in the 1920s is the skirt length theory, which holds that skirt lengths and stock market direction are correlated. If skirt lengths are long, that means the stock market is going down; if they are short, the market is going up. Around late January there is talk about the so-called Super Bowl indicator, which suggests that a win by the AFC team likely means that the stock market will go down in the coming year, whereas a victory by the NFC team portends a rise in the market. Since 1966, the indicator has had an accuracy rate of 80%. It is a fun conversation piece, but probably not something a serious financial advisor would recommend as an investment strategy for clients.