Cause and Effect (Part 1)

What caused the Financial Crisis of 2008?

On the face of it, that’s a simple question. But it really depends what you mean by "cause." This isn’t a word game. Classically, we can look at causation in one of four ways: material cause, efficient cause, formal cause, and final cause. We’ve largely forgotten Aristotle’s notion of the four types of causation, but that doesn’t make them any less practical. If we don’t want something to repeat itself, we’d better understand what brought it about in the first place.

To understand Aristotle’s delineation of causation, it helps to think about a table, and what caused a table to be sitting in your kitchen. The material cause of a table’s presence is the wood or metal that the table is made of. It’s a pretty simple notion–material causes are created by the material something is made of. In the same way, the material cause of genetic trait would be the DNA-sequence in the cell-nucleus.

The efficient cause for a table’s presence would be the carpenter who build’s it. Efficient causes are the action or process that created something. We don’t want to fall into the "post hoc" fallacy–after this therefore because of this–but in order to cause something, it has to come before it. In order for a red billiard ball to cause a blue ball to move, the red one has to be moving first. The post hoc fallacy just mistakes sequence for causation.

These two types of causes are what people usually think of when they think of causation, but the other two are helpful as well. We’ll look at them tomorrow.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2013-08-26T09:53:21+00:00August 26th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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