Unformatted text preview: the stronger the correlation, the greater the predictive value of any change. But sometimes, the correlation coefficient may lead one to false predictions. In that case, it is called a spurious correlation. Economic realities are sometimes not amenable enough to be able to fit into the technical requirements of mathematical or statistical precision. Two specific pitfalls that one can encounter in economic analysis are fallacy of composition and false-cause fallacy . The first one refers to the assumption that if one company will gain from a particular policy, other related companies will gain as well. However, this may not always be the case. The second one refers to a condition when two events are positively correlated or appear simultaneously. In such a case, they may be assumed to have a causal relation as well. However, this is again a false assumption: one needs to look at other related components as well....
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- Fall '10
- Economics, competitive market conditions, correlation. Economic realities