This week (for our 3rd anniversary broadcast) we sit down with Ed Thorp, the math professor who Beat the Dealer, and Beat the Market, and became the first true quant hedge fund manager. His new autobiography is A Man for All Markets.
At the time he was a mathematics professor at MIT, Thorp realized that the house edge in BlackJack could be shifted in a player’s direction with a simple formula for tracking the cards that had been already seen. He eventually made enough money in Vegas that he was kicked out of most of the casinos. In response, he wrote Beat the Dealer. The casinos didn’t believe Baccarat could be beaten, so they did let him play that — until he Thorp started taking them for more money. Eventually, he and Claude Shannon, a fellow professor of information theory at MIT, created a wearable computer to beat roulette (!). That also worked, leading him to get banned from casinos everywhere.
Turning his expertise in probability analysis and mathematics naturally led Thorp to finance. He effectively created statistical arbitrage, expressing this in a hedge fund that returned 20-25% per year.
Thorp also was an early investor in Berkshire Hathaway, buying BRK for $982 (he still owns the shares). He was also an early investor in Kenneth Griffin’s Citadel.
All of the books Thorp references can be found here.
You can stream/download the full conversation, including the podcast extras, on iTunes, Soundcloud, Overcast, and Bloomberg. Our earlier podcasts can all be found on iTunes, Soundcloud, Overcast and Bloomberg.
Next week, we speak with Pulitzer Prize winning journalist Jesse Eisinger, author of The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives.
Ed Thorp’s Books
Beat the Dealer: A Winning Strategy for the Game of Twenty-One by Edward O. Thorp
Beat the Market: A Scientific Stock Market System by Edward O. Thorp
Ed Thorp’s recent reading
Superforecasting: The Art and Science of Prediction Paperback by Philip E. Tetlock and Dan Gardner
The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets by Paul Wilmott and David Orrell
Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Peter D. Kaufman