Financial Concepts: Random Walk Theory
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 longterm buyandhold 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.
It's hard to say how much truth there is to this theory; there is evidence that supports both sides of the debate. Our suggestion is to pick up a copy of Malkiel's book and draw your own conclusions.

Random Walk Theory
The theory that stock price changes have the same distribution ... 
Random Factor Analysis
A statistical analysis performed to determine the origin of random ... 
LogNormal Distribution
A statistical distribution of random variables which have a normally ... 
Chaos Theory
A mathematical concept that explains that it is possible to get ... 
Joseph Effect
The idea that movements in a time series tend to be part of larger ... 
Autoregressive Integrated Moving Average  ARIMA
A statistical analysis model that uses time series data to predict ...

Why is the Fibonacci Retracement important for traders and analysts?
Find out why traders and analysts in financial markets use Fibonacci retracement to help identify support and resistance ... Read Answer >> 
What are the advantages of using a simple random sample to study a larger population?
Learn how simple random sampling works and what advantages it offers over other sampling methods when selecting a research ... Read Answer >> 
What is the criteria for a simple random sample?
Discover the criterion for taking a simple random sample, in contrast to a systematic random sample, each person selected ... Read Answer >> 
What are some examples of stratified random sampling?
Learn what simple random sampling and stratified random sampling are, some examples of stratified random samples, and how ... Read Answer >> 
What are the disadvantages of using a simple random sample to approximate a larger ...
Learn what a simple random sample is, how researchers use it as a statistical tool and the disadvantages it carries when ... Read Answer >> 
How do researchers ensure that a simple random sample is an accurate representation ...
Learn which methods researchers employ to ensure that a simple random sample best approximates the larger population being ... Read Answer >>