Random Walk Theory

This is a discussion on Random Walk Theory within the General Trading Chat forums, part of the Reception category; who " really " believes this...?...

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Old Feb 6, 2008, 1:38am   #1
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Random Walk Theory

who " really " believes this...?
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Old Feb 6, 2008, 1:59am   #2
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Quite a few people actually. I'm not in that camp myself, mind you, but they're out there to be sure. It's a heavily academically influenced theory, so you can guess where a lot of its supporters come from.
John Forman, PhD
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Old Feb 6, 2008, 2:08am   #3
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Randomness is an objective property. Nevertheless, what appears random to one observer may not appear random to another observer who has the key needed to turn the sequence of bits into a readable message.
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Old Feb 6, 2008, 2:40am   #4
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Jan 27 - Random
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Old Feb 6, 2008, 10:06am   #5
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I think it's a pretty good model most of the time, but there are three major flaws:

1) "Noise" traders do not necessarily cancel each other out
2) Markets are not continuous. Any continuous model is necessarily an approximation
3) Use of the bell curve to model price movement is a misunderstanding of the central limit theorem

I could list others but these are the most important imo

Recommended, related book: Misbehaviour of Markets by Mandelbrot.

Last edited by arabianights; Feb 6, 2008 at 10:09am. Reason: hungover, making words make sense
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Thanks! The following members like this post: Bagehot
Old Feb 6, 2008, 10:18am   #6
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markets are chaotic imo, behaviour of chaotic system appears to be random, but they are not
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Old Feb 6, 2008, 10:21am   #7
Joined Dec 2006
Random walk theory definitely might confuse some people, but is good food for thought. Two books I'd recommend:
"A Random Walk Down Wall Street" Malkiel
"A Non-Random Walk Down Wall Street" Lo & MacKinlay

Here is a webpage, the whole website is absolutely TOP-NOTCH, deals with the efficient markets hypothesis. They have many papers for free which are not available elsewhere.

Random Walk Hypothesis
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Old Feb 6, 2008, 11:43am   #8
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Random walk - not for me guv!

Originally Posted by theroguetrader View Post
who " really " believes this...?
Random walk theory is a bit like Socialism - sound great in theory but doesn't actually work in practice. Some academics / politicians / civil servants seem to have a knack of being unable to differentiate between real life and theory. Long may it continue, so that those who can are able to profit.
0007 -
"A Gentleman should not be seen before mid-morning unless he is returning home from the night before"
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