Random walk theory is a financial model that assumes the stock market moves in an unpredictable manner. According to the hypothesis, the future price of each stock is unrelated to its own historical movement or the price of other securities.
The term "random walk theory" was coined by French mathematician Louise Bachelier, who believed that share price movements were unpredictable, much like the steps of a drunk.
However, the theory gained popularity as a result of the work of economist Burton Malkiel, who agreed that stock prices follow a completely random path. As a result, the probability of a share price increasing at any given time is the same as the probability of it decreasing. In fact, he claims that a blindfolded monkey could choose a portfolio of stocks at random that would perform just as well as a portfolio carefully chosen by professionals.

Random walk theory suggests that stock market prices evolve according to a random walk and thus cannot be predicted. Developed by economists like Burton Malkiel, this theory posits that changes in stock prices are independent and follow a random pattern. According to random walk theory, past price movements or trends cannot be used to forecast future prices. This implies that it is impossible to consistently achieve higher returns than the overall market through stock selection or market timing. The theory supports the idea of efficient markets, where all available information is already reflected in stock prices. Therefore, any price changes are a result of new, unforeseen information. This underpins the argument for passive investment strategies like index funds.