random walk theory - Investment & Finance Definition
The theory that the price of stocks, futures, and other investments move randomly up or down, and that they can’t be predicted. Adherents to the random walk theory think that conventional investment techniques such as examining historical price movements, technical analysis, and fundamental analysis are not useful in predicting future price movements.
Random walk theory had its beginnings in research conducted in 1900 by French mathematician Louis Bachelier for his doctoral thesis, ThÃ©orie de la SpÃ©culatio. He developed a sophisticated model for testing randomness in the French government’s bond market. Much of his work didn’t catch on for several decades and further significant studies had to await the introduction of the computer.
In 1965, Paul Samuelson wrote a very influential article that further propelled random walk theory, “Proof that Properly Anticipated Prices Fluctuate Randomly.” According to Samuelson, in an information-efficient market, price changes can’t be forecast if they fully incorporate expectations and information of all market participants.