A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Randomness Is Hard to Accept
Human nature likes order; people find it hard to accept the
notion of randomness. No matter what the laws of chance
might tell us, we search for patterns among random events
wherever they might occur—not only in the stock market but
even in interpreting sporting phenomena.
In describing an outstanding performance by a basketball
player, reporters and spectators commonly use expressions
such as “LeBron James has the hot hand” or “Kobe Bryant is
a streak shooter.” Those who play, coach, or follow
basketball are almost universally convinced that if a player
has successfully made his last shot, or last few shots, he is
more likely to make his next shot. A study by a group of
psychologists, however, suggests that the “hot hand”
phenomenon is a myth.
The psychologists did a detailed study of every shot taken
by the Philadelphia 76ers over a full season and a half. They
found no positive correlation between the outcomes of
successive shots. Indeed, they found that a hit by a player
followed by a miss was actually a bit likelier than the case of
making two baskets in a row. Moreover, the researchers
looked at sequences of more than two shots. Again, they

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found that the number of long streaks (that is, hitting of
several baskets in a row) was no greater than could have been
expected in a random set of data (such as flipping coins in
which every event was independent of its predecessor).
Although the event of making one’s last two or three shots
influenced the player’s perception of whether he would make
his next shot, the hard evidence was that there was no effect.
The researchers then confirmed their study by examining the
free-throw records of the Boston Celtics and by conducting
controlled shooting experiments with the men and women of
the Cornell University varsity basketball teams. The
outcomes of previous shots influenced players’ predictions
but not their performance.
These findings do not imply that basketball is a game of
chance rather than skill. Obviously there are some players
who are more adept at making baskets and free throws than
others. The point is, however, that the probability of making
a shot is independent of the outcome of previous shots. The
psychologists conjecture that the persistent belief in the hot
hand could be due to memory bias. If long sequences of hits
or misses are more memorable than alternating sequences,
observers are likely to overestimate the correlation between

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successive shots. When events sometimes do come in clusters
and streaks, people look for explanations and patterns. They
refuse to believe that they are random, even though such
clusters and streaks do occur frequently in random data such
as are derived from the tossing of a coin. So it is in the stock
market as well.