This my eight article on the nuanced concepts of investment risk for life insurance salespersons. You can read all my previous articles and more in my Blog https://www.helpindiainsure.iistpune.in/category/finance-for-life-insurance/. Life insurance salespersons will sell ethically and correctly, if the concepts of investment risks are understood. Each of the articles so far and the subsequent ones to follow will explore the concept of investment risk in all its nuances.
We also offer the course Finance for the Life Insurance Sales Professional (FLISP). Click on https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/
In my previous article I discussed the role of luck in investments (See https://www.helpindiainsure.iistpune.in/2025/11/11/the-role-of-luck-in-investments/. There is also a scientific basis for such an opinion.
Random Walk Theory
There is a theory called Random Walk Theory. The term “random walk” was popularized by Burton Malkiel (A Random Walk Down Wall Street)[1] and by Eugene Fama (Random Walks in Stock Market Prices)[2].
Random Walk Theory is a school of thought that believes share prices are randomly determined. Therefore the share prices can never be predicted. Experts who try to predict the share prices are operating under false belief that they can predict the share prices. According to Malkiel, an expert will be as good or as bad as monkeys at selecting stocks to invest in or to sell.
To those not initiated into investment theories, this viewpoint may come as a surprise – that such a view can be held at all. After all, no one tells you that the chances of recovery from illness is the same whether you go to a quack or to a qualified doctor! Then why in investment advisory services is there such a viewpoint? Random Walk Theory provides the answers.
Share prices are randomly determined
Random Walk Theory is a solid body of knowledge. The basic premise of this theory is that share prices are determined in the stock exchanges in a random manner. There is no reason for the price of a particular share to be where it is right now. Since share price movements are random, we cannot predict the share price that will be quoted tomorrow or at any point in time in future.
Burton Malkiel challenged those who believed that share prices can be predicted. He made a statement that if monkeys were asked to throw darts at the stock market page of newspapers, their picks would be just as good or as bad as those of professionals using sophisticated mathematics, statistics, graphs and charts.
Wall Street Journal’s Experiment
The Wall Street Journal decided to test Malkiel’s monkey hypothesis. They held a competition, where they replaced monkeys with their staffers. From 1990 till 2004, the competition ran under the name The Wall Street Journal’s Investment Dartboard. 200 investment professionals participated in the competition with the staffers. In 2004 they announced the end of the competition and put out summary results. Wall Street Journal reported that the professionals beat the dart-throwers 87 times. The dart-throwers beat the professionals 55 times[3].
Proof that monkeys can match the experts
The important inferences from the results of the experiment are:
- The dart throwers fared worse that the professionals. But not by a large margin. The dart throwers won 55 times over the professionals. While the professionals won 87 times.
- Possibly more importantly, the professionals were not better 100 % of the time, which is how it should have been if we accept the professionals’ claim of making accurate predictions.
Malkiel was probably right. The monkeys seem to have competed rather well against the professionals! When the results were seen by Malkiel, he reportedly mentioned that the sample size was inadequate to obtain truly random results. Had the sample size been adequate, the staffers and the professionals would have roughly the same rate of success.
And we place our wealth in the hands of professionals, who we hope will be better than us. The lesson to learn from this experiment is that the layperson is likely to be as good or as bad as the expert in predicting the future prices.
In the words of Malkiel monkeys are as good or as bad as the financial ‘experts’. Or as the seasoned investor Warren Buffet says, “I’ll bet on the monkeys”.
Since share price determination in the stock exchanges is random, it is luck that plays an important role in your investment success.
Course: Finance for Life Insurance Sales Professional (FLISP)
This is what you will learn when you join the unique, tried and tested method of IIST’s Finance for Life Insurance Sales Professional (FLISP) course. Visit our https://www.iistpune.in/finance-for-life-insurance-sales-professionals-flisp/ to know how we can help.
More insights in my next article. Look out for regular articles on the concept of risk. In the meanwhile, you may also visit the website (https://www.iistpune.in/) of The Institute of Insurance Sales Training (IIST) to know more about the number of ways we can help you reach great heights in life insurance sales team building and selling.
You can also read more about these issues in “Ignis Fatuus: The Delusions Created in you and for you by the Investment Sector”. Available on Amazon: https://lnkd.in/dR9yuJVQ
[1] Burton Malkiel, (2020), A Random Walk Down Wall Street: The time-tested strategy for successful investing, W.W. Norton & Company
[2] Eugene F Fama, (1995), Random Walks in Stock Market Prices, Financial Analysts Journal, Vol. 51 Issue 1, 1 Jan 1995.