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Investing (and life) is not a 2-dimensional graph

We tend to look for patterns and relationships between variables, whether is it in investing or in other aspects of our lives. Perhaps, it is simply humans’ primal need to understand complexity, or just the way we were taught at schools. More often than not, we only analyse the relationship between two factors and this can lead to some misleading conclusions.

I can think of three reasons for this tendency. One; a 2 factor chart is can be easily understood by almost everyone. Two; for practical reasons, an X-Y graph is easy to present on print. Can you imagine showing a 3 dimensional graph on paper? Lastly, not many people will get exposure to the concept of multi-factor regression, much less understand it. Naturally, because of these factors, I believe we have a tendency to look at relationships with a 2-dimensional view.

I recall coming across an...


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