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What is a Random Walk?

 , October 04, 2016
The random walk hypothesis is the theory that stock market prices are a random series of price movements that can't be predicted. The hypothesis is consistent with well accepted economic principles such as the efficient market theory. Nevertheless, the random walk hypothesis is contested by a wide variety of competing theories that suggest that fundamentals, patterns or trends can be useful in predicting market prices.
A random walk is a mathematical model that describes a path of random steps such as that of a foraging animal. Stock markets have a tendency to go up with time and are therefore not completely random in nature. Nevertheless, a random walk is useful as an analogy as it is extremely difficult or impossible to predict prices in the short to medium term.
Overview: Random Walk
TypeInvesting Economics
DefinitionThe theory that stock prices are a series of random steps that can't be predicted.
Attributed toLouis Bachelier, 1900
Related ConceptsAnimal Spirits
Invisible Hand
Efficient Market Hypothesis
Self-Defeating Predictability

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