Random Walks

Life is a series of random walks. Even if you walk the same path every day (in the literal sense), your individual steps on every walk you take are essentially random, and for the most part you aren’t even conscious of them because this is handled by muscle memory.

When I say the steps are random, what I mean is that if you could precisely measure every step you take—where your foot lands, how much force you apply with your individual muscles—the data would reveal a pattern from a statistical perspective, but each individual step would follow a normal random distribution. In fact, research on human gait variability confirms this, with studies showing that step-to-step fluctuations follow statistical patterns characteristic of complex systems.

I will confess, I spend too much time watching stock market gyrations. Most day-to-day ups and downs are random, and this has been demonstrated by numerous academics and finance professionals. The seminal work on this idea—the Random Walk Hypothesis—was first articulated by economist Burton Malkiel in his 1973 book “A Random Walk Down Wall Street.” Of course, if you pay too much attention to “the news,” you’ll start to believe there’s always a cause or reason for why stocks go up or down, but in reality, the system is too complex to make these attributions with certainty.

It’s true that over longer time horizons (months and years) you can reasonably establish causal relationships, but at the micro level (daily moves), what markets do is mostly random noise.

It’s helpful to remember: you don’t always need to find an explanation for everything. Humans are special in that our brains are pattern-matching algorithms on hyperdrive at all times, except perhaps while we sleep. This tendency, known as apophenia, can lead us to perceive connections and patterns where none exist, much like seeing shapes in clouds or faces in inanimate objects. It’s related to the concept used in the Rorschach test. When you’re staring at a random walk long enough, it’s easy to start inventing a trend that isn’t there. Nassim Nicholas Taleb makes basically this point in “Fooled by Randomness”: in markets especially, we keep mistaking luck for skill.

You should assume there’s a bit of randomness in everything. When something doesn’t happen the way you expect, or you can’t figure out why events unfolded as they did, you may have simply been fooled by randomness. I find that weirdly relieving. Sometimes there just isn’t a clean explanation.