The happenings "inside" the Wisconsin State Treasury and across the street at the State Capitol

The Economy & You 28: Common Mistakes in Economic Analysis


When describing economic events, it is important that students, observers and practitioners avoid two common pitfalls.  Theories and analyses often make statements regarding the cause and effect of events.  Two of the most common mistakes are the post hoc fallacy and the fallacy of composition.

Probably the most prevalent example of erroneous analysis is the post hoc, ergo propter hoc fallacy.  Post hoc, ergo propter hoc (or after this, therefore because of this) suggests that if one event occurs before another, then the first event caused the second event to occur.  Anyone can turn on cable business news and see this common error.  A stock market analyst or news anchor will report the stock market going up or down, and then will proceed to highlight one or two specific events of the day as the cause of the change in the market.

This example is also felt by a number of sports fans.  I was watching Wisconsin in the NCAA tournament and had turned on the game part way through the first half and Wisconsin was in the lead, but the more I watched the worse Wisconsin played.  Out of frustration, I turned the television off.  A few minutes later, I turned the game back on and the Badgers had regained their lead. Yet again, the more I watched, the worse Wisconsin played and their lead dwindled. This scenario replayed itself a few more times as I was convinced that my watching of the game was “jinxing” my beloved Badgers. I was the cause of them playing badly.  So for the sake of my team, I turned off the television and went and did something else. While it is irrational to think that my watching of the game was the cause of poor play, fans and players become superstitious that certain actions unrelated to the game can cause a team to win or lose. 

Closely related to the post hoc fallacy is the incorrect link between correlation and causation.  This fallacy says that if two things are related (or correlated) then there exists a causal relationship.  This is seen in a variety of public policy issues.  One of the most hotly debated topics currently involves the rise in the occurrence of autism in children and immunization shots.  A high percentage of children who develop autism also received their immunization shots.  The correlation between the two events is high.  But whether immunization shots are the cause of autism is difficult to prove as there are numerous other factors that could contribute to autism.  Medical studies have appeared to have disproven the theory that immunizations lead to autism. This debate will continue.

Another fallacy often practiced is the fallacy of composition. This is the incorrect belief that what is true for one or a portion is also true for the whole.  There is an economic example that is well known: the tragedy of the commons. Suppose a large group of sheep herders graze their sheep on the same public lands.  For an individual herder, more sheep grazing will mean more income. However, the land can only sustain a certain number of sheep. So if every herder bought more sheep to graze the land, eventually the land would become overeaten causing everyone’s income to fall. What works well for one or a few, does not work well for everyone.

These fallacies are important to know and understand when talking about economic and public policy and their analysis.  As observers and students, it is essential we understand why certain events occur and whether there is truly a causal link.

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