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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street Hardcover – August 25, 2005
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Fortune's Formula is a fascinating study of the connections between such seemingly unrelated topics as gambling, information theory, stock investing, and applied mathematics. The story involves the stunning brainpower of men such as MIT professor Claude Shannon, who single-handedly invented information theory, the science behind the Internet and all digital media; Ed Thorpe; and John Kelly of Bell Laboratories, who developed the "Kelly criterion," a now-legendary investment strategy for maximizing growth while controlling risk. Initially, Shannon and Thorpe took Kelly's theory to Las Vegas and applied it to roulette and blackjack. Later, they took it to Wall Street and cleaned up--Shannon made a personal fortune while Thorpe created the highly successful hedge firm Princeton-Newport Partners. They both discovered that Kelly's system was particularly effective when applied to arbitrage (minute price differences that result from market inefficiencies). As Poundstone ably demonstrates, the merits of Kelly's criterion are still hotly debated today.
Poundstone has a tendency to meander in his writing, but his asides are so revealing and interesting that they add, rather than detract, from the narrative. The book also includes a cast of fascinating and colorful characters as varied as Ivan Boesky, Warren Buffet, Rudolph Giuliani, and notorious mobsters such as Bugsy Siegel and Meyer Lansky. In explaining the lasting impact of the work done by Shannon, Thorpe, and Kelly, Poundstone even explains Kelly's system for those wishing to follow his formula, offering readers both theoretical and practical lessons. Whether viewed as a how-to guide or straight scientific and financial history, Fortune's Formula proves an entertaining and illuminating analysis of "the most successful gambling system of all time." --Shawn Carkonen
From Publishers Weekly
In 1961, MIT mathematics professor Ed Thorp made a small Vegas fortune by "counting cards"; his 1962 bestseller, Beat the Dealer, made the phrase a household word. With Claude Shannon, the father of information theory, Thorp next conquered the roulette tables. In this prosaic but fascinating cultural history, Poundstone (How Would You Move Mt. Fuji?) tells not only what they did but how they did it. For roulette, Poundstone shows, Thorp and Shannon used a betting scheme invented by Shannon's Bell Labs colleague John Kelly, eventually applying Kelly's technique to investing, resulting in long-term records of extraordinary return with low risk. (Thorp revealed the secret in 1966's Beat the Market, but investors proved harder to persuade than blackjack players.) Many other characters figure into Poundstone's entertaining saga: a forgotten French mathematician, two Nobel Prize–winning economists who declared war on the Kelly criterion, Rudy Giuliani, assorted mobsters, and winners and losers in all types of investing and gambling games. The subtitle is not a tease: the book explains and analyzes Kelly's system for turning small advantages into great wealth. The system works, but requires unusual amounts of patience, discipline and courage. The book is good fun for the rest of us.
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Top Customer Reviews
You can learn a lot from this fun read. The math isn't too involved for general audiences. On the other hand, Mr. Poundstone is very capable with technical topics and I assure you he could have treated the math more in depth. What makes his writing so great is that he provides context and a fun way to learn the ideas with enough substance from the research that you can use it as a bibliography to begin serious research.
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 story revolves around John Kelly, Claude Shannon, Ed Thorpe, and a host of others including mafia members, Rudy Guiliani, Ivan Boesky, the geniuses from LTCM and many others. I enjoyed the way the author linked all of these people together. The story kept me interested throughout the entire book. And this was my second time reading it! I picked it up by mistake, read the first chapter, thought to myself "hey, I have read this book already", but I was hooked again so I kept reading. Glad I did.
The Kelly system was interesting to me because Thorpe and Shannon used it to win money at the casinos and also to make a fortune on Wall street. The Princeton-newport partners were highly successful for a number of years and surpassed almost all of Wall street with their consistently high returns. Maybe it was a great streak of luck as they implied, but maybe the market is inefficient and smart people can pull money out at will.
I am thankful for reading this book and learning about the Kelly system which is not all that different from my present risk management system. Except the Kelly system has a few rules I presently do not use. But it has gotten me interested and I will test it out and probably implement some of it into my trading.
William Poundstone is a fine author. I've re-read very few books, and Poundstone's "Prisoner's Dilemma" is one of them. "Fortune's Formula will be another.