Edward O. Thorp is a legend in both the gaming and the quant worlds. The author of Beat the Dealer and Beat the Market, he went from math professor and blackjack whiz to renowned hedge fund manager. In A Man for All Markets (Random House, 2017), he reflects on his life and the power of thinking differently—and deeply.
Thorp learned how to puzzle things out for himself as a largely self-taught child. He also devised methods for learning how to learn. For instance, when at the age of 12 he set out to master Morse Code, required to get his ham radio operator license, he invested almost three weeks’ income from delivering newspapers in a “tape machine” to practice transcribing code. The machine’s speed was adjustable. Young Thorp’s plan “was to understand every tape at a slow rate, then speed the tapes up slightly and master them again.” He measured his progress against that of World War II army trainees. He writes: “I drew a graph of the hours I spent versus my speed and found that using my method I learned four times as fast per hour spent as did the army trainees.” That Thorp was uncommonly bright might also have contributed just a tad to this carefully recorded outcome.
Fast forward to Thorp’s time at the blackjack table. He recalls playing at one casino where the rules were excellent: “players could insure, split any pair, and double down on any set of cards. Even so, the cards ran badly, I lost steadily, and after four hours I was behind $1,700 and discouraged. Of course, I knew that just as the house can lose in the short run even though it has the advantage in a game, so a card counter can fall behind and this can last for hours or, sometimes, even days. Persisting, I waited for the deck to become favorable just one more time.” Soon enough the deck produced a 5 percent advantage, so Thorp made the maximum bet of $300, all his remaining chips. Dealt a pair of 8s, he pulled out his wallet to bet another $300 on the split hands. And, getting a favorable second card on one of the 8s, he dropped another $300 on the hand. The dealer busted, so Thorp gained $900. The deck continued to be favorable, “calling for big bets,” and the next deck was good as well. In a few minutes he was ahead $255 and quit for the evening.
As Thorp reflects, “for the second time, the Ten-Count System had shown moderately heavy losses mixed with ‘lucky’ streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and the investment worlds.”
Indeed, at Princeton Newport Partners, which restarted its statistical arbitrage operation in 1992, Thorp expected “the statistical behavior of a large number of favorable bets to deliver [their] profit.” By 2000 they were placing a million bets a year, at an average trade size of $54,000, or “one bet every six seconds when the market is open.”
A Man for All Markets is an inspiring memoir. Not surprisingly, Thorp, in his final chapter, writes: “Education has made all the difference for me. Mathematics taught me to reason logically and to understand numbers, tables, charts, and calculations as second nature. Physics, chemistry, astronomy, and biology revealed wonders of the world, and showed me how to build models and theories to describe and to predict. This paid off for me in both gambling and investing.” And, to come full circle, he notes: “Much of what I’ve learned came from schools and teachers. Even more valuable, I learned at an early age to teach myself. This paid off later because there weren’t any courses in how to beat blackjack, build a computer for roulette, or launch a market-neutral hedge fund.”
A Man for All Markets – More from the book jacket below
The incredible true story of the card-counting mathematics professor who taught the world how to beat the dealer and, as the first of the great quantitative investors, ushered in a revolution on Wall Street.
A child of the Great Depression, legendary mathematician Edward O. Thorp invented card counting, proving the seemingly impossible: that you could beat the dealer at the blackjack table. As a result he launched a gambling renaissance. His remarkable success—and mathematically unassailable method—caused such an uproar that casinos altered the rules of the game to thwart him and the legions he inspired. They barred him from their premises, even put his life in jeopardy. Nonetheless, gambling was forever changed.
Thereafter, Thorp shifted his sights to “the biggest casino in the world”: Wall Street. Devising and then deploying mathematical formulas to beat the market, Thorp ushered in the era of quantitative finance we live in today. Along the way, the so-called godfather of the quants played bridge with Warren Buffett, crossed swords with a young Rudy Giuliani, detected the Bernie Madoff scheme, and, to beat the game of roulette, invented, with Claude Shannon, the world’s first wearable computer.
Here, for the first time, Thorp tells the story of what he did, how he did it, his passions and motivations, and the curiosity that has always driven him to disregard conventional wisdom and devise game-changing solutions to seemingly insoluble problems. An intellectual thrill ride, replete with practical wisdom that can guide us all in uncertain financial waters, A Man for All Markets is an instant classic—a book that challenges its readers to think logically about a seemingly irrational world.