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Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

Amazon.com Price:  $9.99 (as of 26/04/2019 17:40 PST- Details)

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Description

In 1956 two Bell Labs scientists discovered the scientific formula for getting rich. One used to be mathematician Claude Shannon, neurotic father of our digital age, whose genius is ranked with Einstein’s. The other used to be 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 conceivable, as fast as conceivable.

Shannon and MIT mathematician Edward O. Thorp took the “Kelly formula” to Las Vegas. It worked. They realized that there used to be 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 at the same time 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 used to be conceivable for a smart investor to beat the market―and William Poundstone’s Fortune’s Formula will convince you that he used to be right.

Fortune’s Formula is an interesting study of the connections between such seemingly unrelated topics as gambling, information theory, stock making an investment, 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 in the back of 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 whilst controlling risk. To start with, 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 whilst Thorpe created the highly successful hedge firm Princeton-Newport Partners. They both discovered that Kelly’s system used to be 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, moderately 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 affect 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

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