A few weeks ago the Economist’s blog had a piece with the tag line “How increases in computing power have driven higher share turnover”. It shows a nice chart with two lines rising inexorably upwards, pretty close together, one representing the transistor count in integrated circuits from 1947 to date, and the other shares traded on the New York Stock Exchange over the same period.
Computing power has increased some 600-fold over the past 15 years […] This advancement has facilitated the ability to trade ever-larger volumes of shares.
Whenever I read something like this, my knee-jerk reaction is “correlation is not causation”. Just because two phenomena behave in roughly the same way, it doesn’t mean that one of them is causing the other. One of the better known examples of this is the strong statistical association between the annual changes in the S&P 500 stock index and butter production in Bangladesh. Admittedly it’s plausible that increased computing power has contributed to higher share turnover, but “driven” seems rather strong.
I stick by my knee-jerk reaction, but after discussing it with a friend I think there’s something even less satisfactory going on. The chart showing these two inexorably rising lines uses a logarithmic scale. And the lines are actually pretty divergent from about 1970 onwards. What this means is that the rate of growth isn’t even the same. This is a very tenuous hook indeed on which to hang a conclusion of causality.