A math­e­ma­ti­cian goes from the casino to the stock mar­ket.

The Washington Post Sunday - - OUTLOOK - Mar­garet Wertheim is a sci­ence writer and au­thor of books on the cul­tural his­tory of physics.

Half­way through Ed­ward O. Thorp’s lark-filled ac­count of his pi­o­neer­ing ca­reer as a gam­bler and in­ven­tor of stock-trad­ing tools, he tells us that “gam­bling is in­vest­ing sim­pli­fied.” So by re­verse, in­vest­ing is gam­bling com­plex­i­fied. A good deal of Thorp’s life has been de­voted to prov­ing that the same kinds of math­e­mat­i­cal skills that come in handy count­ing cards can also be fruit­fully ap­plied to “the great­est casino on earth”: Wall Street.

Thorp has won in both are­nas. As a young math­e­ma­ti­cian at MIT in the early 1960s, he de­vel­oped a the­o­ret­i­cal frame­work that showed how a black­jack player could beat the house ad­van­tage, de­spite cen­turies of math­e­mat­i­cal rea­son­ing that had sup­pos­edly proved this im­pos­si­ble. Once he pub­lished his “high­low” sys­tem in his best­selling book “Beat the Dealer” (1962), it un­leashed an army of math nerds who brought such an on­slaught of sci­ence to bear on the game that it forced casi­nos to change their rules, in­clud­ing mov­ing from one deck of cards in a shoe to sev­eral. Le­gions of pro­fes­sional black­jack teams us­ing Thorp’s sys­tem have en­gaged in a Dar­winian war with casi­nos ever since, among them a leg­endary MIT team whose ex­ploits in­spired the film “21,” star­ring Kevin Spacey.

Thorp’s ex­pe­ri­ence with the math­e­mat­ics of black­jack, and later other casino games such as roulette and bac­carat, prompted him to start ap­ply­ing his tal­ents to the stock mar­ket. Here, too, he found ways to beat the sys­tem by dis­cov­er­ing and exploiting pric­ing anom­alies in se­cu­ri­ties. “Bet­ting on a hedge I had re­searched was like bet­ting on a black­jack hand where I had the ad­van­tage,” he writes, only in­stead of $500 a hand, the stakes were now “$50,000 to $100,000 per hedge.”

Although Thorp didn’t in­vent hedg­ing, he made sig­nif­i­cant the­o­ret­i­cal con­tri­bu­tions to its devel­op­ment and thus be­came one of the quants who rev­o­lu­tion­ized Wall Street. At one point his Princeton/New­port Part­ners was beat­ing the stock mar­ket by more than 20 per­cent. For those lucky enough to have what even­tu­ally be­came a $10 mil­lion min­i­mum, Thorp could al­most guar­an­tee bril­liant re­turns: PNP “never had a los­ing year, or even a los­ing quar­ter,” he states.

With his Rock­yesque rounds of beat­ing the odds, Thorp has led a re­mark­able life, but what strikes me most about his story is what hap­pened be­fore he set foot in a casino. As he de­scribes his early years and the ob­sta­cles he over­came, we have a nar­ra­tive arc with some of the same qual­i­ties as that of Louis Zam­perini, the Olympic track-star hero of Laura Hil­len­brand’s “Un­bro­ken,” who grew up just a few miles from Thorp in a dis­ad­van­taged sub­urb of Los An­ge­les County.

Be­fore he got the gam­bling bug, Thorp had been pur­su­ing a life in sci­ence, and what a life!

Born in 1932, Thorp grew up a De­pres­sion­era son of car­ing, but hugely over­worked, blue-col­lar par­ents, who of­ten la­bored on night shifts and, of ne­ces­sity, largely left their two sons to raise them­selves. Dur­ing World War II, his mother worked as a riv­eter at Dou­glas Air­craft, and his fa­ther, who’d at­tended col­lege for a year on the GI bill, was un­able to af­ford to com­plete his de­gree. Both hoped Ed­ward would be able to par­take of the ed­u­ca­tion they’d been de­nied.

Left to his own de­vices in a C-grade school dis­trict, Thorp was a self-starter who taught him­self chem­istry and built a home­made lab in which, like the young Oliver Sacks, one of his chief lines of re­search was blow­ing stuff up. He learned to make gun­pow­der and used it to launch rock­ets and rocket-pow­ered sleds. He pro­gressed to gun-cot­ton and ni­tro­glyc­er­ine and nearly blew off his hand be­fore wisely de­cid­ing to stop. Like Sacks (in his mem­oir “Un­cle Tung­sten”), Thorp un­der­stands the hor­ror these ex­ploits will in­duce in the minds of con­tem­po­rary par­ents and is grate­ful for the free­dom that gave him an ed­u­ca­tion that couldn’t be learned solely from books.

As a high school ju­nior, he de­cided to en­ter a chem­istry com­pe­ti­tion in which the prizes were schol­ar­ships to lead­ing uni­ver­si­ties. Hav­ing skipped a grade, he was just 15, and most of the com­pe­ti­tion would be 17- and 18-year-old se­niors. But, since his par­ents couldn’t help him with col­lege fees, a schol­ar­ship was the only way he might re­al­ize his dream of be­com­ing a sci­en­tist. Un­for­tu­nately, he couldn’t af­ford a proper slide rule, so he was un­able to com­plete enough cal­cu­la­tions dur­ing the exam and only came in third in a field stacked with kids from L.A’.s elite schools. The next year, he taught him­self physics and was one of 40 fi­nal­ists, out of 16,000 en­trants, in the na­tional West­ing­house Sci­ence Tal­ent Search, which won him a schol­ar­ship to Berke­ley.

There, too, he en­coun­tered un­fair­ness, caus­ing him to switch fields from chem­istry to quan­tum physics, and fi­nally to a PhD in math at UCLA. His tra­jec­tory re­flects the move­ments in a pin­ball ma­chine, and Thorp ac­knowl­edges that in other eco­nomic cir­cum­stances, his ca­reer might have been dif­fer­ent. Fi­nan­cial dif­fi­culty helped fuel his attraction to gam­bling, though he in­sists he wasn’t in it for the money: “What in­trigued me was the pos­si­bil­ity that merely by sit­ting in a room and think­ing, I could fig­ure out how to win.”

There are sev­eral ques­tions opened up here: What if this beau­ti­ful mind hadn’t been ham­pered by pe­cu­niary prob­lems? What else might Thorp have achieved? With a de­cent slide rule, he’d prob­a­bly have won the chem­istry com­pe­ti­tion and a place at Cal­tech. “Sci­ence [was] my play­ground,” he says, and one rather mourns the loss to sci­ence. How many other Thorps are be­ing thwarted?

And why does it take gam­bling to ig­nite en­thu­si­asm for math­e­mat­ics among pub­lish­ers? When Thorp be­gan his black­jack cal­cu­la­tions at MIT, he was a post-doc in one of the world’s great math de­part­ments. We get end­less de­tails about card-count­ing and not a hint about his re­search. I wanted to know about his day job. Thorp re­mained in aca­demics un­til 1982, pro­fess­ing a love for re­search and teach­ing, but the fi­nan­cials fi­nally took over — as they have done for an in­creas­ing num­ber of math­e­ma­ti­cians. This seems to me an enor­mous loss, not only be­cause the quants have al­ready brought us once to the brink of ruin, but be­cause so much IQ is be­ing chan­neled away.

The sec­ond half of Thorp’s book is a his­tory of the fi­nan­cial world over the past 50 years, with its grow­ing re­liance on math, and it makes for pretty un­sa­vory read­ing. By his telling, the re­wards will be deeply di­vided be­tween the rich and the rest. Along with War­ren Buf­fett, he urges us to put our money safely into in­dex funds. Just as most gam­blers can’t beat the house, most of us can’t beat the mar­ket. “Gam­bling now is largely a so­cially cor­ro­sive tax on ig­no­rance, drain­ing money from those who can­not af­ford the losses,” he writes in his clos­ing pages. “Most of what I’ve learned from gam­bling is also true for in­vest­ing.” It is to Thorp’s credit as a hu­man be­ing that he lands his fi­nal punch straight.


Af­ter Ed­ward O. Thorp de­vised a math­e­mat­i­cal way to win at gam­bling, he turned his at­ten­tion to beat­ing Wall Street: “the great­est casino on earth.”

A MAN FOR ALL MAR­KETS From Las Ve­gas to Wall Street, How I Beat the Dealer and the Mar­ket By Ed­ward O. Thorp Ran­dom House. 396 pp. $30

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