The Ladder of Causation
Traditional quant investing relies on correlation, observing 'what' happens, but correlation does not imply causation. Judea Pearl's 'Ladder of Causation' provides a framework to overcome these limitations by asking "Why," enabling more robust and intelligent investment decisions. This page visually explores each rung of the ladder with investment case studies and interactive AI-powered analysis.
This is the stage of identifying patterns and correlations observed in data. It answers questions like, "If interest rates rise, will value stocks outperform?" but cannot explain "why."
Investment Case: Interest Rates and Style Investing
For certain periods, interest rates (X-axis) and the relative performance of value vs. growth stocks (Y-axis) show a positive correlation. However, this relationship can be a 'spurious correlation,' easily broken by other economic factors (confounders).
Relationship between Interest Rates and Value/Growth Relative Performance