Why Correlations Matter

Suppose you are invited to a wedding. You know you are expected to bring flowers, but you do not know how much you are expected to spend. There is a wide range of prices at the florist’s. You do not want to underspend, but you do not want to overspend either.

So you poll three of your friends: Jill and John both say $100, while Bob says $40. If there is no correlation between the three, then your safest bet is to spend the average of the three amounts, which is $80.

Now suppose that Jill and John always think alike in every respect. Maybe they are twins, soulmates, or just identically-minded people. If Jill says $100, you already know John will also say $100 before he even opens his mouth. This means there is no additional information contained in John’s opinion. There is perfect correlation between Jill and John. In this case, you just put Jill and John in the same basket, and Bob in a different basket. Your safest bet is the average of $100 and $40, which is $70 – not $80!

Correlations affect decisions. Decisions affect outcomes.