Fortune's Formula

Fortune's Formula

The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

Book - 2005
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Baker & Taylor
The author of How Would You Move Mt. Fuji reconstructs the fascinating story of two scientists who applied their talents to the roulette and blackjack tables of Vegas and then made a killing on Wall Street.

McMillan Palgrave

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.



Publisher: New York : Hill & Wang, 2005
Edition: 1st ed
ISBN: 9780809045990 (pbk.)
0809046377 (hardcover : alk. paper)
Branch Call Number: 795.015192 POU
Characteristics: 386 p. ; 24 cm

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j
jimg2000
May 02, 2015

First read this in 2008 right before the Great Recession. Some mathematician/scientists who figured out how to beat the casinos, and the biggest one of them all - Wall Street. A great read covering a lot of grounds on hedge fund trading developments, particularly on the Kelly Criterion. Searching thru the web, here is a good link on Kelly:

http://www.investopedia.com/articles/trading/04/091504.asp

Near the end of the book, it listed Professor Shannon's portfolio. It only had 10 stocks and 81% from a single stock as of 1/21/81. Either he was a great stock broker (as the author believed) or extremely lucky. Those scientists are the fathers in algorithmic program trading and Quants with ultra fast computers in Michael Lewis's 2014 "Flash Boys" and Scott Patterson's "The Quants."

johnf108 Dec 19, 2012

More about Shannon and a mention of his work with portfolios, can be found in the 2012 book 'The Logician and the Engineer' [Boole and Shannon] by the very clear mathematics writer Paul Nahin.

r
redcastle
Jun 08, 2012

Compares gambling with investing in the stock market and the use of math to gain an advantage. Even with a "sure thing" bets don't always payoff and you need a money manegement system to keep from going broke.

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j
jimg2000
May 02, 2015

In its simplest form, the Kelly Criterion is stated as follows:

The optimal Kelly wager = (p*(b+1)—1) / b where p is the probability (% chance of an event happening) and b is the odds received upon winning ($b per every $1 wagered).

It was Ed Thorp who first applied the Kelly Criterion in blackjack and then in the stock market.

http://compoundingmyinterests.com/compounding-the-blog/2012/10/12/how-did-ed-thorp-win-in-blackjack-and-the-stock-market.html

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