Meaning of correlation coefficient
July 13th, 2010
If variable X and Y has correlation 0.1, how much does it help to predict Y based on X? In the simplest binary case, the probability (p) to correctly predict Y based on X is a linear function of correlation (c), i.e.
$$p=\frac{c+1}{2}$$
That means, a 0.1 correlation will increase the prediction probability from 0.5 to 0.55, a 5% increase. This could be significant if you are betting a lot of money :)
