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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
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The book has facets of each, though in the end, the main takeaway is the superiority of the Kelly system for managing bankrolls whether gambling or investing.
For the most part, it is an interesting read though there are sections that bog down. I'd recommend the book as an interesting historical look at some people who tried to beat the house - in gambling or investing - and as a primer on the Kelly method but I wouldn't suggest that anyone head to Vegas or Wall St. with their kid's college savings based on this book.
Only quibble is there is not quite enough math in it. One gets the feeling that author Poundstone wanted to leave out the math, so as not to intimidate the non-mathematical reader, but by doing that he doesn't provide enough details on the Kelly formula. Had to go online and read some articles about the formula to understand it. That information should have been in the book.
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.
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.
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.
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.
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.
Top international reviews
This book, I'm sorry to say, is not his best. In fact it's two books. One is about how to beat the system, by fair ways or mostly foul. Hence the crime stories. The second book is an examination of Efficient Market Theory. EFT is the notion that since all public information is already in the price, you can't beat the stock market.
You can see why the two stories overlap. But they are, or should be, separate.
Beating the stock market is, however, what some people routinely do. And anyone who has owned shares has already been baffled how share prices can ignore great events but yo-yo on trivialities. From Bachelier to Samuelson, EFT has ignored these obvious problems. But it's very difficult to confound EFT, because you have to design a scientific way of beating the market. The Kelly system got most of the way to being scientific. Ah, but science is replicable. And once there are more than a few Kelly betters in the market the scientific advantage disappears.
Many of the great names, from Bernoulli (utility) to Shannon (information) get name checks here, useful if you're going to interview with an investment bank. I'd give the book 4 stars if it was by anyone else, and I really don't quarrel with previous critics who've given it five. It's just that I have got used to having very high expectations of this author.
Try Against the Gods: The Remarkable Story of Risk or A Random Walk Down Wall Street: A Time-Tested Strategy for Successful Investing instead or - alright - as well on this subject. And anything else by Poundstone if you have any curiosity about anything.
However, having an interest in sports betting and investment, I also found the book very helpful in explaining the benefits and potential pitfalls of the Kelly approach (as Poundstone mentions, there is still antipathy towards the approach among some gambling experts who really should know better). In particular, he takes pains to explain why Kelly succeeds over both level staking and Martingale systems, and how volatility can be controlled through reduction in Kelly proportions and also diversification. I have benefited personally for these and other insights in the book, which I can thoroughly recommend.
Not a dry lecture with misleading equations that no one understands but a readable history that explains how you should invest. No one knows what the stock markets will do next but you can have an edge if you take a systematic approach.