In 2001, a British psychologist carried out an experiment in which he asked three people to virtually invest £5 in the UK stock market. The three people were a professional operator, an astrologer and a four-year-old girl. The result was surprising: at the end of the year the merchant had lost 46,2% of the initial investment, the astrologer 6,2% while the girl had obtained a positive result of 5,8%.
This was reported by an article in the Italian edition of Technology Review, according to which others have conducted similar experiments with the same results. The implication of these experiments is that random investing strategies are as good as the traditional ways, or even better.
Alessio Biondo of the University of Catania, together with a couple of researchers, is trying to test this idea by simulating the performance of four traditional strategies based on 10 years of historical data from the German, UK and US equity markets, and then comparing the results with those of a completely random strategy.
The results of this comparison are similar for all markets analyzed: standard trading strategies are successful in short time horizons; however, over the long run, these perform no better than a purely random strategy. Furthermore, the results of a random strategy are less volatile than those of traditional market strategies and, therefore, are less risky.
Biondo argues that random trading strategies could become a powerful market force precisely because of the lower volatility. For example, this type of approach could help reduce imitative behavior, bursting any asset bubbles before it's too late.
