A chimp can do it. A 4-year-old child too. Even a house cat has managed to succeed. Numerous anecdotes exist of animals outperforming the stock market using darts, a grab bag, or a toy mouse, leading physicist Alessandro Pluchino to ponder: perhaps the effectiveness of these random investment “strategies” isn’t entirely random. He partnered with economist Alessio Biondo from the University of Catania in Italy to meticulously examine the idea that blind investing could outperform hiring a financial advisor and reaching for the Pepto-Bismol.
They analyzed 15 years of data from four major stock exchanges and compared four leading trading algorithms against one designed to execute trades at random. Surprisingly, the random algorithm performed just as well as the others, while exhibiting significantly less day-to-day volatility. Why might this be the case? Investors tend to perceive patterns within random fluctuations or computer errors and then follow suit. This tendency to herd can lead to amplified mistakes. A stark example is how a single sale of 75,000 futures contracts by an institutional investor in May 2010 triggered a 9 percent drop in the Dow Jones Industrial Average.
Biondo and Pluchino have built a niche around randomness; they’ve previously utilized mathematical models to advocate for allocating corporate promotions and legislative appointments through random selection. Though their suggestions were largely ignored, in light of the current economy’s unpredictability, perhaps the Federal Reserve should contemplate a more whimsical approach to investing.