Random walk hypothesis

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The random walk hypothesis is a financial theory (it has been described as 'jibing' with the efficient market hypothesis), stating that market prices evolve according to a random walk and thus cannot be predicted.

The term was popularized by the 1973 book, "A Random Walk Down Wall Street", by Burton Malkiel, currently a Professor of Economics and Finance at Princeton University.

[edit] RWH vs market trends

The hypothesis does have its detractors. Research in behavioral finance has shown that some phenomena, for example market trends, might in some cases contradict that hypothesis.

Profs. Andrew W. Lo of MIT and A. Craig MacKinlay set about to prove the theory wrong with their paper and synonymous book,"A Non-random Walk Down Wall St.", published 1999 by the Princeton University Press . They argue that the random walk does not exist and that even the casual observer can look at the many stock and index charts generated over the years and see the trends. If the market were random, it is argued, there would never be the many long rises and declines so clearly evident in charts. Subscribers to the random walk hypothesis counter argue that past performance cannot be indicative of future performance in a semi-strong market economy.

Prediction Company, started by chaos physicists Norman Packard and Doyne Farmer, has been attempting to predict the stock market since 1991. So far, they have proved moderately successful. ^[1]