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Random walk theory gained popularity in 1973 when Burton Malkiel wrote "A

Random Walk Down Wall Street", a book that is now regarded as an investment
classic. Random walk is a stock market theory that states that the past
movement or direction of the price of a stock or overall market cannot be used
to predict its future movement. Originally examined by Maurice Kendall in 1953,
the theory states that stock price fluctuations are independent of each other and
have the same probability distribution, but that over a period of time, prices
maintain an upward trend.

In short, random walk says that stocks take a random and unpredictable path.
The chance of a stock's future price going up is the same as it going down. A
follower of random walk believes it is impossible to outperform the market
without assuming additional risk. In his book, Malkiel preaches that both
technical analysis and fundamental analysis are largely a waste of time and are
still unproven in outperforming the markets.

Malkiel constantly states that a long-term buy-and-hold strategy is the best and
that individuals should not attempt to time the markets. Attempts based on
technical, fundamental, or any other analysis are futile. He backs this up with
statistics showing that most mutual funds fail to beat benchmark averages like
the S&P 500.

While many still follow the preaching of Malkiel, others believe that the investing
landscape is very different than it was when Malkiel wrote his book nearly 30
years ago. Today, everyone has easy and fast access to relevant news and stock
quotes. Investing is no longer a game for the privileged. Random walk has never
been a popular concept with those on Wall Street, probably because it condemns
the concepts on which it is based such as analysis and stock picking.

Burton G. Malkiel, an economist professor at Princeton University and writer of A Random


Walk Down Wall Street, performed a test where his students were given a hypothetical stock
that was initially worth fifty dollars. The closing stock price for each day was determined by
a coin flip. If the result was heads, the price would close a half point higher, but if the result
was tails, it would close a half point lower. Thus, each time, the price had a fifty-fifty chance
of closing higher or lower than the previous day. Cycles or trends were determined from the
tests. Malkiel then took the results in a chart and graph form to a chartist, a person who
“seeks to predict future movements by seeking to interpret past patterns on the assumption
that ‘history tends to repeat itself’”.[5] The chartist told Malkiel that they needed to
immediately buy the stock. When Malkiel told him it was based purely on flipping a coin, the
chartist was very unhappy. Malkiel argued that this indicates that the market and stocks could
be just as random as flipping a coin.

The random walk hypothesis was also applied to NBA basketball. Psychologists made a
detailed study of every shot the Philadelphia 76ers made over one and a half seasons of
basketball. The psychologists found no positive correlation between the previous shots and
the outcomes of the shots afterwards. Economists and believers in the random walk
hypothesis apply this to the stock market. The actual lack of correlation of past and present
can be easily seen. If a stock goes up one day, no stock market participant can accurately
predict that it will rise again the next. Just as a basketball player with the “hot hand” can miss
the next shot, the stock that seems to be on the rise can fall at any time, making it completely
random.