Betting and Trading are two pastimes that fascinate me no end. The magical hue of possibility, chance and risk that radiate from both these endeavours is alluring in more ways than one. A betting system or a trading system has the potential to take you from rags to riches in an instant, of course it can also go the other way and take you from riches to rags, but that is what makes these games of chance so addictive. From the beginning of time, gambling to win a fortune has existed.
I’ve now read countless books on the topic of probability, chance, luck, statistics, betting, investing, trading and gambling. One thing that hit me was the recurring mention of one revolutionary man, who’s name kept cropping up in several of these books; Edward O. Thorp.
Born in August 1932 , Edward Oakley Thorp is now 84 years old. In no uncertain terms this man is a mathematical genius and major pioneer in the use of quantitative investment techniques. Over the years he has succeeded as a mathematics professor, author, hedge fund manager, and blackjack player.
Edward O. Thorp is also the father of card counting. Way back in 1962 when he was a postdoctoral student at MIT he published a book called Beat the Dealer, in it he reveals the revolutionary point system that was successfully used by professional and amateur card players for two generations. From Las Vegas to Monte Carlo, the tables were turned and the house no longer had the advantage at blackjack. This book made him so famous that casinos banned him from playing — he says one even resorted to drugging him. Many then changed their rules to thwart people from using his counting system.
Around the same time Ed, along with his friend and colleague Claude Shannon (a world famous scientist), came up with an attempt to beat roulette, using a contraption tied to his foot that is now described as the world’s first wearable computer; Input and output were handled with the tap of a shoe and an audible tone in an earpiece, with the computer itself simply strapped around the waist. Thorp would later explain the system in detail in a paper titled “The Invention of the First Wearable Computer,” published in 1998.
Ed was on a roll, it wasn’t too long until an expedition into Wall Street netted him hundreds of millions of dollars. His Princeton Newport Partners fund, set up in 1969, is recognised as the first quant hedge fund (one that uses algorithms). This fund is mentioned in the book ‘The Quants’ by Scott Patterson, a Wall Street Journal reporter.
Over an 18 year period, Princeton Newport Partners fund turned $1.4m into $273m, compounding at more than double the rate of the S&P 500 without suffering so much as one quarter with a loss. Thorp’s then revolutionary use of mathematics, options-pricing and computers has no doubt given him a huge advantage along the way.
His unconventional career path and money-conjuring abilities has brought him much attention and awe from many of the world’s greatest investors, including Warren Buffett. Ed Thorp and Warren Buffett enjoy playing Bridge together and Buffett has long since advised many investors to move to Thorp. Bill Gross and Ken Griffin also set up their successful Hedge funds on the advice of Thorp.
Over the years, Thorp has used his extensive knowledge of probability and statistics, in the stock market, by discovering and exploiting a number of pricing anomalies in the securities markets.
Thorp’s first hedge fund was Princeton/Newport Partners and he is currently the President of Edward O. Thorp & Associates, based in Newport Beach, California. In May 1998, Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years.
Nowadays, Ed Thorp drives a Tesla and no longer gambles. He has a cynical view of Wall Street and sold his hedge fund so that he could concentrate and enjoy life. He doesn’t let his age get in his way and lives life to the full. After he dies his body will be cryogenically frozen.
Books that Ed Thorp has authored or is mentioned in:
Beat the Dealer
This is the world famous book by Ed Thorp himself. Containing the basic rules of the game, proven winning strategies, how to overcome casino counter measures and spot cheating. Beat the Dealer is the bible for players of this game of chance. Perforated cards included in the book are a convenient way to bring the strategies into the casino. Beat the Dealer is a winning strategy for the game of 21. The essentials, consolidated in simple charts, can be understood and memorized by the average player.
It was reading this book when I first discovered the living legend that is Ed Thorp. It’s a fascinating book about gambling strategies and creating good fortune. This book tells the stories behind not just one betting system, but practically every system ever devised, from a 1738 hypothesis called the St. Petersburg wager to today’s Wall Street computer simulations.
In 2005 William Poundstone published Fortune’s Formula, a book that took creative license with the name since although the book briefly mentioned Thorp’s original paper on blackjack, it was mainly about the Kelly Criterion.
The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It – Paperback – January 25, 2011 by Scott Patterson
This book mainly covers the careers of four “quants” — Ken Griffin, Cliff Asness, Peter Muller and Boaz Weinstein. Each of the quants attended the country’s best schools and stood out among their talented peers. Each gravitated to Wall Street, where they racked up impressive gains through their highly complex trading models and hedging strategies. Thorp was one of the earliest quants. He developed an early mechanism to price warrants and used that advantage to rack up fantastic returns for his investors. His work inspired numerous quants and other investors.
One shocking revelation in this book is that Ed Thorp realised Bernie Madoff was scamming with a Ponzi scheme 17 years before it was made public knowledge. Thorp advised his clients to liquidate their investment with Madoff–but never revealed his finding to the regulators or the investment community.
A Man for All Markets: Beating the Odds, from Las Vegas to Wall Street – Hardcover – 9 Feb 2017
by Edward O. Thorp (Author)
The incredible true story of the card-counting mathematics professor who taught the world how to beat the dealer and, as the first of the great quantitative investors, ushered in a revolution on Wall Street.
The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economics Series) – 27 Mar 2012
by Leonard C. MacLean and Edward O. Thorp – This book is the definitive treatment of “Fortune’s Formula,” also described as “The Kelly Criterion”, used by gamblers and investors alike to determine the optimal size of a series of bets.
The Mathematics of Gambling
An analysis of baccarat, backgammon, blackjack, gambling games, money management, roulette and the wheel of fortune.
Beat the Market
A Scientific Stock-Market System. One of the most influential books of all time on Wall Street, whose methods launched “the quant” revolution of modern quantitative finance.
A brief introduction to probability theory presenting step-by-step finite, discrete and continuous probability concepts.