Background to the random walk theory
Random walk theory was first coined by French mathematician Louis Bachelier, who believed that share price movements were like the steps taken by a drunk; unpredictable.
However, the theory became famous through the work of economist Burton Malkiel, who agreed that stock prices take a completely random path. So, the probability of a share price increasing at any given time, is exactly the same as the probability that it will decrease. In fact, he argues that a blindfolded monkey could randomly select a portfolio of stocks that would do just as well as a portfolio carefully selected by professionals.
Random walk theory has been likened to the efficient market hypothesis (EMH), as both theories agree it is impossible to outperform the market. However, EMH argues that this is because all of the available information will already be priced into the stock’s price, rather than that markets are disorganised in any way.