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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

by William Poundstone (Author)

163 customer reviews

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In 1956 two Bell Labs scientists discovered the scientific formula for getting rich. One was mathematician Claude Shannon, neurotic father of our digital age, whose genius is ranked with Einstein's. The other was John L. Kelly Jr., a Texas-born, gun-toting physicist. Together they applied the science of information theory―the basis of computers and the Internet―to the problem of making as much money as possible, as fast as possible.

Shannon and MIT mathematician Edward O. Thorp took the "Kelly formula" to Las Vegas. It worked. They realized that there was even more money to be made in the stock market. Thorp used the Kelly system with his phenomenally successful hedge fund, Princeton-Newport Partners. Shannon became a successful investor, too, topping even Warren Buffett's rate of return. Fortune's Formula traces how the Kelly formula sparked controversy even as it made fortunes at racetracks, casinos, and trading desks. It reveals the dark side of this alluring scheme, which is founded on exploiting an insider's edge.

Shannon believed it was possible for a smart investor to beat the market―and William Poundstone's Fortune's Formula will convince you that he was right.

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Editorial Reviews

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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.

Paperback: 386 pages
Publisher: Hill and Wang; 1st edition (September 19, 2006)
Language: English
ISBN-10: 0809045990
ISBN-13: 978-0809045990
Product Dimensions: 5.5 x 1.1 x 8.3 inches
Shipping Weight: 13.4 ounces (View shipping rates and policies)
Average Customer Review: 163 customer reviews
Amazon Best Sellers Rank: #51,980 in Books (See Top 100 in Books)
- #16 in Books > Humor & Entertainment > Puzzles & Games > Gambling
- #103 in Books > Business & Money > Investing > Stocks
- #194 in Books > Business & Money > Investing > Introduction

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R. Speizer

Really interesting. Well worth the money!

November 21, 2017

Verified Purchase

This a fascinating history book. The author is a great writer. The history of how people (try) to make money gambling and in the stock market. And why it is so hard.
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.

2 people found this helpful

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History Dean

Good but muddled

September 5, 2018

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It's hard to describe what this book is. Is it a primer on betting strategies? A look at practical math? A history of mathematically inclined gamblers? A "mob" story? A manual for cash management in investing?

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.

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Dan Brin

Good, but needs a little more mathematical explanation

October 26, 2017

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Excellent book. Solid explanations of both the Kelly formula and its historical context with Ed Thorp, Claude Shannon, etc.

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.

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jared ackerman

Geeeeeezus its long!!

August 2, 2017

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Amazing book that breaks down the Kelly Criterion and all of the past mathematical equations and other weirdness that helped him establish it. The book is chocked full of good stories and explanations but it's drawn out with stories that in my opinion are based solely off of people's ego instead of there lack of understanding.
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.

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Zizhuo Wang

Very good book talking about the fundamentals between logic, information and probability

August 17, 2013

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This book talks about the fundamentals about logic, information and probability. It talks a lot about Claude Shannon's story which is very attractive to me. And then it discusses the generation of information theory and the essence of it. As a scientific researcher in a very much related field (operations research), I find the discussion precise and accurate. It also talks about the story about several other important figures in the development of information theory, such as Kelly, Thorpe etc. In particular, it includes the debate over the celebrated Kelly's formula. This is the best book I have ever read on the topic of Kelly's formula. And it really explains it well. I will recommend this book to any person who is interested in information theory or computer science (or any related field).

6 people found this helpful

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P. Kim

Ed Thorp the true genius

April 16, 2017

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Love the story about Kelly formula.

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.

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Enduro707

Great book

February 23, 2017

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Great book, keeps attention. All the stories are hilarious, and got the Kelly criterion lesson from this book- with some tweaking, as everyone does, it has brought losses down and gains up. Shannon and Thorp are the rare examples to read about, like the Tesla's and Einsteins of the world...

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David J. Aldous

Entertaining anecdotes of colorful characters and a well-explained math idea

May 27, 2007

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"Fortune's formula" is the author's cute name for what mathematicians call the Kelly criterion. Much of the book is entertaining episodic anecdotal history of characters like Shannon, Kelly, Thorp, Milken, Boesky and Long Term Capital Management. The formula-free discussion of mathematical aspects of the Kelly criterion is rather good (to my taste as a professional mathematician). Entertaining account of dispute between the proponents of Kelly (math types) and economists led by Samuelson who viewed it as too risky even in the long run. Memorable slogan: 100% Kelly strategy marks the boundary between aggressive and insane investing.

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.

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