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

by Burton G. Malkiel

Efficient-market theory, modern portfolio theory, and various asset-pricing relationships between risk and return all are built on the premise that stock-market investors are rational. As a whole, they make reasonable estimates of the present value of stocks, and their buying and selling ensures that the prices of stocks fairly represent their future prospects. By now, it should be obvious that the phrase “as a whole” represents the economists’ escape hatch. That means they can admit that some individual market participants may be less than rational. But they quickly wriggle out by declaring that the trades of irrational investors will be random and therefore cancel each other out without affecting prices.