Thursday, September 22, 2011

Random walks.

Finance academics often view stock prices as being "random walks" in that the price change at any given time is basically random.  If it wasn't, then you'd be able to predict where the price was going and make a killing trading stocks.  But random walks also occur in other areas of life.  For example, in professional basketball, a recent research paper shows that the scoring pattern can be characterized as a random walk.  

I finally feel vindicated, as in all my 20+ years living in the USA I have never seen the point of professional basketball.  With games frequently scoring in the high double digits, but the winning margin only being a few points, it always seems that the final outcome is really just down to luck.  Turns out this is not so far from the truth.