Random-Walk Hypothesis

Random Walk Theory

An investment philosophy holding that security prices are completely unpredictable, especially in the short term. Random walk theory states that both fundamental analysis and technical analysis are wastes of time, as securities behave randomly. Thus, the theory holds that it is impossible to outperform the market by choosing the "correct" securities; it is only possible to outperform the market by taking on additional risk. Critics of random walk theory contend that empirical evidence shows that security prices do indeed follow particular trends that can be predicted with a fair degree of accuracy. The theory originated in 1973 with the book, A Random Walk Down Wall Street. See also: Efficient markets theory.

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random-walk hypothesis

The hypothesis that states that past stock prices are of no value in forecasting future prices because past, current, and future prices merely reflect market responses to information that comes into the market at random. In short, price movements are no more predictable than the pattern of the walk of a drunk. This controversial hypothesis implies that technical analysis is useless in its attempts to predict future price movements in the market.