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

by Burton G. Malkiel

Those who can consistently flip heads will be declared winners. The contest begins and 1,000 contestants flip coins. Just as would be expected by chance, 500 of them flip heads and these winners are allowed to advance to the second stage of the contest and flip again. As might be expected, 250 flip heads. Operating under the laws of chance, there will be 125 winners in the third round, 63 in the fourth, 32 in the fifth, 16 in the sixth, and 8 in the seventh. By this time, crowds start to gather to witness the surprising ability of these expert coin-flippers. The winners are overwhelmed with adulation. They are celebrated as geniuses in the art of coin-flipping, their biographies are written, and people urgently seek their advice. After all, there were 1,000 contestants and only 8 could consistently flip heads. The game continues and some contestants eventually flip heads nine and ten times in a row.* The point of this analogy is not to indicate that investment-fund managers can or should make their decisions by flipping coins, but that the laws of chance do operate and that they can explain some amazing success stories.