Edward O. Thorp - A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

Ed Thorps memoir reads like a thrillermixing wearable computers that would have made James Bond proud, shady characters, great scientists, and poisoning attempts (in addition to the sabotage of Eds car so he would have an accident in the desert). The book reveals a thorough, rigorous, methodical person in search of life, knowledge, financial security, and, not least of all, fun. Thorp is also known to be a generous man, intellectually speaking, eager to share his discoveries with random strangers (in print but also in person)something you hope to find in scientists but usually dont. Yet he is humblehe might qualify as the only humble trader on planet Earthso, unless the reader can reinterpret whats between the lines, he or she wont notice that Thorps contributions are vastly more momentous than he reveals. Why?

Because of their simplicity. Their sheer simplicity.

For it is the straightforward character of his contributions and insights that made them both invisible in academia and useful for practitioners. My purpose here is not to explain or summarize the book; Thorpnot surprisinglywrites in a direct, clear, and engaging way. I am here, as a trader and a practitioner of mathematical finance, to show its importance and put it in context for my community of real-world scientist-traders and risk-takers in general.

That context is as follows. Ed Thorp is the first modern mathematician who successfully used quantitative methods for risk takingand most certainly the first mathematician who met financial success doing it. Since then there has been a cohort of such quants, such as the whiz kids in applied mathematics at SUNY Stony Brookbut Thorp is their dean.

His main and most colorful predecessor, Girolamo (sometimes Geronimo) Cardano, a sixteenth-century polymath and mathematician whosort ofwrote the first version of Beat the Dealer, was a compulsive gambler. To put it mildly, he was unsuccessful at itnot least because addicts are bad risk-takers; to be convinced, just take a look at the magnificence of Monte Carlo, Las Vegas, and Biarritz, places financed by their compulsion. Cardanos book Liber de ludo aleae (Book on Games of Chance) was instrumental in the later development of probability, but, unlike Thorps book, was less of an inspiration for gamblers and more for mathematicians. Another mathematician, a French Protestant refugee in London, Abraham de Moivre, a frequenter of gambling joints and the author of The doctrine of chances: or, a method for calculating the probabilities of events in play (1718) could hardly make both ends meet. One can easily count another half a dozen mathematician-gamblers, including greats like Fermat and Huygenswho were either indifferent to the bottom line or not particularly good at mastering it. Before Ed Thorp, mathematicians of gambling had their love of chance largely unrequited.

Thorps method is as follows: He cuts to the chase in identifying a clear edge (that is something that in the long run puts the odds in his favor). The edge has to be obvious and uncomplicated. For instance, calculating the momentum of a roulette wheel, which he did with the first wearable computer (and with no less a coconspirator than the great Claude Shannon, father of information theory), he estimated a typical edge of roughly 40 percent per bet. But that part is easy, very easy. It is