We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is the Random Walk Theory?

By James Doehring
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The random walk theory claims that the future movements of stock prices cannot be predicted based on past movements. While admitting that long-term market prices do rise, it states that short-term movements are practically random and unpredictable. It rejects both technical analysis and fundamental analysis as valid tools for predicting stock behavior. Proponents of the random walk theory typically advocate long-term investing rather than trying to time the market.

Though the theory was first investigated in 1953, it didn’t gain popularity until the book A Random Walk Down Wall Street was published by American economist Burton Malkiel in 1973. The theory essentially states that market prices follow a random path up and down, much like the random walk mathematical function. In a random walk function, a trajectory is determined by a succession of random steps, either up or down. It can accurately describe a number of natural phenomena, including the paths of gas molecules and animals alike. This random behavior is what proponents of the random walk theory see in stock charts.

Advocates of the theory typically do agree that market prices will rise in the long term. They recommend investors employ a buy-and-hold strategy rather than try to time the market. While advocates of the theory agree that it is possible to outperform the market, they claim that this only comes with risk attached. It is impossible to eliminate this inherent risk no matter how well-informed an investor is, says the random walk theory.

On the other hand, technical analysis is the study of stock performance based on past trends. Technical analysts typically attempt to use a stock’s price and volume history to forecast the stock’s future movements. They claim that investors are not the rational agents that many economists make them out to be, but rather they are influenced by emotions, cognitive errors and arbitrary preferences. This inherent irrationality, technical analysts claim, leads to predictable behavior. Supporters of the random walk theory reject these claims, asserting that such trends would be self-defeating as soon as investors recognized them.

Another challenge to the random walk theory is fundamental analysis. Though quite different from technical analysis, it is also rejected by proponents of the random walk theory. Fundamental analysis looks at a business’s prospects—its products offered, financial health, business plan, competitors, etc.—as a means of determining its future stock performance. It tends to assume that markets will behave in an efficient, rational way and that they will adjust quickly.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.