Monkey Business And the Random Walk

by | Sep 5, 2014

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A couple of years ago, IFA Magazine boldly investigated the theory that dumb animals might make better forecasters than most humans – not just the usual monkeys with keyboards in outer space, but also creatures such as Bob Beckman’s dog, whose stock-picking skills earned him the 1970s equivalent of a million pounds. This month, we’re taking the argument still further out into the wilder reaches of probability.

One of the largest ever random walk experiments came to a resounding conclusion in 2002, when the Wall Street Journal wound up a 14-year inquiry to determine whether a blindfolded monkey with a dartboard could consistently beat a panel of stock-picking experts. In 142 six-month trials, a suitable monkey (or rather, its nearest available equivalent, a financial journalist) would fire off blindfolded darts at a printed sheet of stock names on a wall, while a team of four professionals made their own more considered choices.

Predictably, the monkeys underperformed the pros, but not by as much as you might imagine. The pros won 87 of the 142 contests, but rather remarkably the darts won 55. More embarrassingly, during the first 100 bouts the pros beat the DJ index by an unimpressive 51 wins to 49.

 
 

But the fun really started during the last 30 trials (between 1999 and 2002), when a team of WSJ readers was finally invited to join the contest. The amateurs’ average six-monthly loss of 4% was embarrassing enough – but it was positively cringe-making in comparison with the monkeys, which lost only 1%. Ouch.

So, the Challenge for This Autumn…

Now fair’s fair, of course, that was a highly untypical period of stock market history. The dotcom boom of the late 1990s gave way to the car-crash of 2000-2002, and all bets were decisively off by the time the contest was dropped. But popular legend has it that the monkeys’ stocks continued to be better long-term holds than the pros’ selections, many of which turned out to be skyrockets that quickly fizzled and died.

So, as St Leger’s Day hurtles into view and then disappears again into the autumn mist, we’d like to know your prognoses for a difficult autumn. Are the global equity markets overpriced, and if so, does it matter? Can the Emerging Markets revival continue? And will Russia stage a final dash for the oil and gas shut-off valve, as certain pundits have dared to suggest? Care to give us your views? Or even take a punt on the Footsie for 31st December? Go on, we dare you. There’s a bottle of Moet for the nearest estimate, as well as all the chest-beating glory you can handle. Drop us a line at editor@ifamagazine.com, and we’ll do the rest.

 

Thanks!

Michael Wilson, editor

 

 

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