Document Type

Article

Publication Date

4-15-2001

Keywords

market efficency, behaviorism, economics

Abstract

Random Walk: Burton Malkiel defines a random walk as "one in which future steps or directions cannot be predicted on the basis of past actions." Within the context of the stock market, a random walk for a stock's price means that it is as likely to fall as to rise, regardless of previous price performance (Malkiel, 1996). To hold the random walk hypothesis as truth is to foresake all punditry regarding fundamental and technical analysis and to abandon long-standing shibboleths such as evolving industries and sectoral rotation. Essentially, random walk implied that "winners" could not consistently be picked. The Wall Street Journal lends credence to this hypothesis with its long-running contest of "darts versus the experts," where stocks selected by darts tossed at the financial page are matched, performance-wise, with stocks selected by market experts. The random walk hypothesis is not particularly popular in the general financial community as it implies that financial management brings only a layer of cost - and the investor is better served by investing in a fund which closely represents the overall market. "Random walk" was derided as an academic contrivance by many in the financial sector. However, the hypothesis gained support as financial information flowed more freely and in greater volume over time, and market/industry/firm transactions became more transparent.

Publisher

Department of Economics, South Dakota State University

Series Number

2001-3

Number of Pages

15

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Economics Commons

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