Burton Malkiel

Definition

Burton Malkiel is a prominent economist known for his influential work on the efficient market hypothesis. His book, 'A Random Walk Down Wall Street', has been a seminal text in the field of finance, promoting the idea that stock market prices follow a random walk and cannot be consistently outperformed through active investment strategies.

5 Must Know Facts For Your Next Test

1. Malkiel's 'A Random Walk Down Wall Street' was first published in 1973 and has since become a classic in the field of finance.
2. Malkiel's work was instrumental in the development and widespread acceptance of the efficient market hypothesis, which challenges the notion that investors can consistently outperform the market through active stock selection.
3. Malkiel advocated for index investing, arguing that it is virtually impossible for most investors to consistently beat the market, and that a diversified portfolio tracking a broad market index is the best investment strategy for most people.
4. Malkiel's work has had a significant impact on the investment management industry, leading to the rise of passive index funds and the decline of active stock picking as the dominant investment approach.
5. Malkiel's ideas have been widely adopted by the financial industry and have influenced the investment strategies of many individual and institutional investors.

Review Questions

• Explain the key principles of the efficient market hypothesis and how they relate to Malkiel's work.
  • The efficient market hypothesis, which was heavily influenced by Malkiel's work, states that financial markets are efficient, meaning that asset prices fully reflect all available information. This implies that it is impossible for investors to consistently outperform the market through active stock selection or market timing, as any new information is quickly incorporated into prices. Malkiel's 'Random Walk Down Wall Street' book was instrumental in promoting this idea and advocating for passive index investing as the best approach for most investors.
• Describe Malkiel's perspective on the ability of active investment managers to outperform the market and the implications of this view.
  • Malkiel argued that it is virtually impossible for most active investment managers to consistently outperform the market over the long term. He believed that stock prices follow a random walk and that any apparent patterns or mispricing in the market are quickly arbitraged away by efficient markets. This view led Malkiel to advocate for passive index investing, as he believed that it is extremely difficult for even the most skilled active managers to consistently beat the returns of a broad market index. Malkiel's work has had a significant impact on the investment industry, contributing to the rise of index funds and the decline of active stock picking as the dominant investment approach.
• Evaluate the influence of Malkiel's ideas on the investment management industry and the broader financial landscape.
  • Malkiel's work on the efficient market hypothesis and the random walk theory has had a profound and lasting impact on the investment management industry and the broader financial landscape. His ideas have challenged the traditional belief in the ability of active investment managers to outperform the market and have led to the widespread adoption of passive index investing strategies. This shift has had significant implications for the industry, including the decline of active stock picking, the rise of low-cost index funds, and the increased focus on diversification and long-term investment horizons. Malkiel's influence can be seen in the investment strategies of both individual and institutional investors, as well as in the development of financial regulations and policies aimed at promoting efficient and transparent markets.

Related terms

Efficient Market Hypothesis: The theory that financial markets are efficient, meaning that asset prices fully reflect all available information and it is impossible to consistently outperform the market through active stock selection or market timing.

Random Walk Theory: The idea that stock prices cannot be predicted and follow a random, unpredictable path, similar to the motion of a drunkard's walk, implying that it is impossible to consistently outperform the market.

Index Investing: A passive investment strategy that aims to match the performance of a broad market index, such as the S&P 500, by investing in a diversified portfolio of securities that replicate the index.