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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street Paperback – September 19, 2006
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“Seldom have true crime and smart math been blended together so engagingly.” ―The Wall Street Journal
“An amazing story that gives a big idea the needed star treatment . . . Fortune's Formula will appeal to readers of such books as Peter L. Bernstein's Against the Gods, Nassim Nicholas Taleb's Fooled by Randomness, and Roger Lowenstein's When Genius Failed. All try to explain why smart people take stupid risks. Poundstone goes them one better by showing how hedge fund Long-Term Capital Management, for one, could have avoided disaster by following the Kelly method.” ―Business Week (four stars)
“'Fortune's Formula' may be the world's first history book, gambling primer, mathematics text, economics manual, personal finance guide and joke book in a single volume. Poundstone comes across as the best college professor you ever hand, someone who can turn almost any technical topic into an entertaining and zesty lecture.” ―The New York Times Book Review
About the Author
William Poundstone is the bestselling author of several nonfiction books, including Labyrinths of Reason and The Recursive Universe.
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I would still recommend this book but I would google "Kelly Criterion" for some background information about what in Christ's name you're actually reading about.
All sorts of famous people and scientists who worked on ways to beat the systems. Some succeeded.
Also fascinating facts about Rudy Guliani, Michael Milken, Ivan Boesky and others.
I could not put it down. A great book.
To lecture briefly ..... in a hypothetical gambling or investment situation where you have a range of choices to bet on/invest in, and where you know the correct probability and profit/loss from each possible outcome, the Kelly criterion tells you how to split your investment between the different choices. The point of the formula is to take into account the fact that (when investing all your money) a 20% gain one year followed by a 20% loss next year works out as a 4% loss, not zero. Its use in splitting beween risky and safe investments is uncontroversial. People get emotional about the "efficient market hypothesis" that you cannot assess probabilities for future stock prices more accurately than the consensus probabilities reflected in current prices; but this is an empirical question, like asking "can you beat Tiger Woods at golf", and of course has the same answer for most people. Poundstone conveys such concepts pretty well.
Ed Thorp is very curious and brilliant. He tests the Kelly formula on gambling and investing. And made a lot of money.
He further develops new tools for both gambling and investment, making more money. In fact, Thorp has one of the best track records in investing.
The book also talks about Claude Shannon, a great mathematician and a great investor.
Overall, a highly recommended book.
The book interweaves mathematics, history and stories quite well and is a very good read. Imagine an investment book that reads almost like a fiction novel :)
The material is very well researched and it contains history of gambling, and investment and how information theory evolved. The book also gives a view into how a powerful school of thought can eclipse other schools of thought. in this case, Samuelson, et all from MIT refute geometric returns from Kelly's criteria even though working proof is present and the alpha factor in returns is not a myth.
I am glad the person recommended this book to me.