Random Walk of the Markets

The Guardian has a cute yet informative article up, reporting on a stock market game competition between investment “experts”, finance students, and a cat, names “Orlando”:

By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat’s portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals’ £5,176.60.

As could be expected, the cat didn’t exactly use elaborate search strategies:

While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.

The Guardian points out that there are some to whom this might not be a surprise:

The result indicates that the “random walk hypothesis”, popularised in economist Burton Malkiel’s book A Random Walk Down Wall Street, is perhaps truer than we thought. Burkiel’s book explores the idea that share prices move completely at random, making stock markets entirely unpredictable.

If this truly is a random-walk situation then this not only shows to yet another type of FIRE specialist to be useless but might also call into question those attempts to model stock market behavior using Machine Learning research (apart from the other issues such as imperfect information and an adversarial setting). We can’t know for sure about the latter, maybe stock markets can enter different states, each of which could be modeled well.

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