From Las Vegas To Wall Street: A Maths Professor Who Figured Out How To Trump Markets

by Vivek Kaul - Apr 4, 2017 07:17 AM
From Las Vegas To Wall Street: A Maths Professor Who Figured Out How To Trump MarketsPhoto by Stephen Chernin/Getty Images
  • The autobiography of a mathematician who figured out how to make money in a casino, and then turned his sure gaze on the stockmarket.


Warren Buffett remains the world’s most famous, eminently quotable and lovable investment guru. Nevertheless, there are other investment gurus as well, who have done their share of things but are not as famous as the billionare Buffett is.

One such is Edward O. Thorp. Honestly, I had never heard of Thorp before I happened to read his autobiography A Man for All Markets. But having read the book, it is safe to say that Thorp’s is a truly inspiring and interesting story. And the best parts of it come before he became an investment professional and in the process an investment guru.

Thorp grew up in the aftermath of the Great Depression which started in 1929 and up until he entered college he was pretty much self-taught. His parents were busy with their jobs. Thorp writes about his childhood in a reasonable amount of detail in the first few chapters of the book.

He talks about his days as a newspaper delivery boy (which is something that Buffet did as well) and what that experience taught him. He also talks about his various experiments with various chemicals and the time he and a friend put a pouch full of a powerful dye called aniline red in the largest indoor swimming pool in Southern California.

Once the pouch opened, the red dye spread across the swimming pool. And the swimmers thought it was blood. As Thorp writes: “Then the first scream came, followed by cries of alarm and more screams… The pool emptied in panic. Within minutes everyone was out.” The point being that even his childhood pranks, like his investment structures in the later years, were pretty sophisticated.

In another part of the book, Thorp talks about deciding to appear for a chemistry examination organised by the American Chemical Society. Those who topped the examination were offered scholarships to study science in some of the best colleges in California. Thorp prepared for the examination in the hope of getting a scholarship.

On the day of the exam, his father drove him to the exam centre. He knew the answers to all the questions, but pretty soon realised that in order to answer the last section of the exam paper he needed a full-sized slide rule (remember those were pre-calculator days) and not the ten-cent toy slide rule that he was carrying.

And given this disadvantage Thorp came fourth in the exam and couldn’t pick his favourite college to study science. This was majorly disappointing for him. But soon he found out that there was a similar physics exam as well which offered scholarships to the best colleges. But the trouble was that he hadn’t studied physics as well as he had studied chemistry.

Nevertheless, he prepared for the exams, taught himself physics and ended up topping the exam. In the process, he got a scholarship and an opportunity to go to college.

The section dealing with Thorp’s childhood is by far the best part of the book. It portrays him as a child who pretty much brought himself up and taught himself everything that he ever wanted to. And this was an attitude that Thorp carried into his adult life as well.

There is also a certain level of honesty in the way Thorp discusses things. At one point he tells us why his parents got divorced. His mother was having an affair with someone, his father found out and they got divorced.

This is something that Thorp did not know for a long time. He only came to know about it much later in life. He also talks about his mother cashing out on the money that he had saved in order to put himself through college. Typically, if you are the kind who reads Indian biographies or autobiographies, you will never find a mention of such human frailties. And this is what makes the book even more interesting.

While doing his PhD in Mathematics, Thorp became interested in gambling and the fact that no one had ever found a way of beating the casino. Thorp eventually developed a system which allowed players to beat the casino in the game of blackjack. The details of this system were published in his 1962 book Beat the Dealer.

The book taught legions of gamblers how to make money in a casino. Thorp spends a few chapters discussing his obsession with blackjack. While this might impress the international audience, I found this section a bit of a drag given my limited understanding of blackjack in particular and card games in general.

Thorp, along with another mathematician and the father of information theory, Claude Shannon, went on to make a wearable computer that could be used to predict the game of roulette. In fact, the section on when Thorp and Shannon along with their spouses go to a casino to test their system and their computer to predict a game of roulette is particularly hilarious.

Having beaten the casino, Thorp got interested in the stockmarket: “Gambling is investing simplified. The striking similarities between the two suggested to me that, just as some gambling games could be beaten, it might also be possible to do better than market averages. Both can be analysed using mathematics, statistics and computers.”

Hence, Thorp went on to develop a system which generated greater returns than the market. In the process, he established and ran what was perhaps the world’s first quant hedge fund. He ran it for more than two decades. The fund gave fantastic returns to its investors.

During the process of running a quant hedge fund, Thorp developed a formula for valuing options. This formula was very similar to the Black-Scholes-Merton formula for valuing options which ultimately led to Robert Merton and Myron Scholes winning the Nobel Prize in economics in 1997. Black had died in 1995.

In fact, Thorp came up with the formula in 1969 and wrote about it in his book Beat the Market. Sometime later, he got a letter from Fischer Black that they had taken the key idea known as delta hedging from Beat the Market, and gone a step ahead and devised an options pricing formula.

Among other things, Thorp predicted as far as back as 1991 that Bernie Madoff was running a Ponzi scheme, only to be proven right 17 years later. In the last few chapters, Thorp offers some good investment tips and also some tips on how to lead a good life. For those familiar with the subject of investing, these chapters can be a little boring. But they also reiterate that successful investing is about doing the same things over and over again, correctly.

And lest I forget to point out, while he was doing all this, Thorp also held a full-time job as a Maths professor at various universities across the US up until 1982, when he just couldn’t take office politics anymore and decided to quit.

A Man for All Markets is a nice and a breezy read. It won’t teach you how to beat the casino at gambling. Neither will it teach you how to generate better returns than the market. For that you will have to read the other books that Thorp has written over the years. What it will teach you is that challenging the status quo and drawing your own conclusions is a very important part of a living a good life.

If you have enjoyed any of the biographies of Warren Buffett, you will certanly enjoy this book as well.

Vivek Kaul is the author of the 'Easy Money' trilogy. He tweets @kaul_vivek
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