Not Indicative

“Past Performance Is Not Indicative of Future Results.” This little piece of boilerplate, or some variation on it, will be familiar to anyone who’s ever heard a pitch for an investment or a mutual fund. What I think it worth reflecting on is just how odd a phenomenon this is, and how disorienting it can be.


A cornerstone of scientific thought is that past performance damn well does indicate future results. It is this assumption that makes it reasonable to propose testable hypotheses based upon prior observation, and that can be see in even the earliest forerunners of the scientific method. This assumption is deeply embedded in our modern worldview.

In fact, the more education you’ve had, particularly in engineering or the sciences, the more biased you’re likely to be towards this assumption. It simply makes sense that the way to solve a problem is to collect data, look for patterns, and make predictions based on the assumption that those patterns will persist into the future.

Random Walk

Now consider this quote from “A Random Walk Down Wall Street“:

A random walk is one in which future steps or directions cannot be predicted on the basis of past actions. When the term is applied to the stock market, it means that short-run changes in stock prices cannot be predicted. Investment advisory services, earnings predictions, and complicated chart patterns are useless. On Wall Street, the term “random walk” is an obscenity. It is an epithet coined by the academic world and hurled insultingly at the professional soothsayers. Taken to its logical extreme, it means that a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by the experts.

Now, financial analysts in pin-striped suits do not like being compared with bare-assed apes. … [T]here’s a tremendous battle going on, and it’s fought with deadly intent because the stakes are tenure for the academics and bonuses for the professionals.

The random walk hypothesis is an extreme example of the “not indicative” disclaimer that we started with, but it carries essentially the same message: You can’t figure out what will happen tomorrow (either for the market as a whole, or for a given fund’s relative performance) based on what happened yesterday.


I don’t know whether or not financial markets follow a random walk. But, if markets are essentially random, and we act as if they are not, our investments are likely to end unhappily, and our biases are likely to blind us to the reasons why.

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