Reverse causality
When the thing you thought was the effect is actually causing the thing you thought was the cause, or the two push each other.
In plain English
Happy staff sell more, but selling also makes staff happy. Successful companies spend on perks, and perks don't necessarily make companies successful. A correlation shows that two things move together; it can't say which way the arrow points. Reverse causality can make an effect look bigger than it is, and sometimes, when the arrows push in opposite directions, it can hide a real one.
Uncle Gary explains
HR saw that happy teams sell more and introduced Fun Friday. Kevin's boss saw the same chart, decided that sales cause happiness and raised the targets. A study that used weather and windows found that happiness did raise sales, by more than the simple chart suggested.
Why it matters for your money
'Companies that buy back shares do well' and 'investors who trade less earn more' are both correlations. Before acting on one, ask whether the result might be causing the behaviour.
Where we tested it
Related terms
All glossary terms. Educational content, not financial advice.