There are anecdotes aplenty of creatures beating the stock market with darts (or a grab bag or a toy mouse), and that got physicist Alessandro Pluchino thinking: Maybe the success of these random investment "strategies" wasn't so random after all.
Pluchino teamed up with Alessio Biondo, an economist who worked with him at the University of Catania in Italy, to rigorously test the hypothesis that investing blind is a better strategy than hiring a financial adviser and ordering in a case of Pepto-Bismol. They took 15 years of data from four of the world's biggest stock exchanges and pitted four top trading algorithms against one programmed to trade at random. The random algo did at least as well as the others—and it experienced a lot less day-to-day volatility. Why? Investors probably see patterns in random fluctuations or computer glitches and then pile on. This herding instinct amplifies mistakes.
That's partially how, for example, a single sale of 75,000 futures contracts by an institutional investor in May 2010 turned into a 9 percent drop in the Dow Jones Industrial Average. Biondo and Pluchino have made something of a career out of randomness—they previously used mathematical models to argue that corporate promotions and legislative appointments should be made at random as well. Nobody took their advice, but considering how dicey the economy has been lately, maybe the Fed should consider investing in darts.
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