Posted by Mike Smith :: May 15, 2009 @ 6:34 am

In far too many cases, we wrongly conclude that an event or action is the cause of a result, rather than a mere influence or related occurrence. When analyzing our finances, and indeed our lives, it is important to consider whether causality exists between the event and the result.

A Non-Financial Example:

A recent study compared heart attack victims to healthy volunteers and found the heart patients had a higher number of bacteria in their mouths. Many ne ws outlets picked up this story under headlines like "Brush your teeth, it could prevent a heart attack." But is that really what the research showed? Good oral health has been shown to have many other positive benefits, so it seems to be a reasonable conclusion. Causality may indeed exist between bacteria in the mouth and heart attack risk, but an equally plausible explanation is that someone who doesn’t take care of his mouth also doesn’t take care of the rest of his body. If that’s the case, brushing your teeth won’t prevent a heart attack.

A Financial Example:

If you were to learn that most people filing for bankruptcy have credit cards, you might wrongly conclude that credit cards cause bankruptcy. If that conclusion led you to never have a credit card, you could miss out on the many benefits that using a credit card responsibly can bring, such as a longer credit history, rewards points, and payment flexibility. Irresponsible use of credit may certainly be a contributing factor (or even a cause) of many bankruptcies, but simply having a card is not.

Conclusions drawn from a result back to a potential cause often miss the critical element of causality. Why does causality matter? Without it, you may be focusing your efforts in the wrong place or missing out on great opportunities.

Have you ever taken an action that turned out to have no effect on the desired result?