The man behind the name, “Fortune’s Formula,” is a living legend: Edward O. In William Poundstone published Fortune’s Formula, a book that took. Author William Poundstone explores how Claude Shannon, the major developer of information theory, affected finance, investing and gambling. These activities. When I reviewed the book Priceless I thought I had reviewed “Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the.
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Like Thompson sampling, the Kelly criterion has been reinvented many times; Poundstone lists at least 4 inventors: Thus, notorious characters like Bugsy Siegel enter into a book about statistics as gambling becomes a major revenue source replacing the loss of alcohol. An interlude brings in Kelly and his Kelly criterion itself, and makes clear the connection to information theory and efficient markets: So Thorp moved onto roulette and the stock market. Which sounds a bit paradoxical.
And the risk of buying warrants can be offset just buy buying or selling short just some of the underlying stock. Thorp made money off warrants, and then published the strategy for increasing the credibility of his new hedge fund, and moved onto convertible bonds by applying similar reasoning: In one amusing anecdote, Black-Scholes used their pricing model to spot a particularly mispriced warrant; then the company changed the terms of the warrants, wiping out the warrant holders and Black-Scholes, in a way that insiders had known was coming and sold all their warrants.
Thorp returned to trading eventually, and in terms of his lifetime performance:. In May Thorp reported that his investments had grown at an average 20 percent annual return with 6 percent standard deviation over The Thorps recently endowed a chair at the University of California at Irvine mathematics department. The gift consists of one million dollars to be invested entirely in stocks, with the university limited to withdrawing only 2 percent a year. The fund is expected to compound exponentially in inflation-adjusted dollars.
Ultimately, Thorp hopes, it will fund the most richly endowed university chair in the world, and will help draw exceptional mathematical talent to UC Irvine. What is a little remarkable to me is how well Shannon did financially by 3 early venture capital investments, and how little Shannon contributed intellectually after his information theory paper; I had always somehow assumed that Claude Shannon, a genius who had offhandedly made a major contribution to genetics simply because his advisor forced him to work on genetics, and had created fully-formed information theory, had died in the s or something, because how else would such a genius have not made further major contributions?
Shannon died in ! Poundstone explains that Shannon was simply too unambitious and perfectionist to work hard on any big topics or write up and publish properly any of his findings! One of the more depressing demonstrations that raw genius is not enough.
I did not notice any major errors asides from perhaps a confusion of Euler and Gauss, and overstating the obscurity of Louis Bachelier’s life. One downside is that despite the involvement of Jimmy Savage, Poundstone never mentions the connections to subjective Bayesianism, personal interpretations of probability, or Thompson sampling. Which would, if nothing else, have partially explained why Savage’s career was so peripatetic – it wasn’t just his acerbic opinions as Poundstone claims.
Goodreads helps you keep track of books you want to read. Want to Read saving…. Want to Read Currently Reading Read. Refresh and try again. Open Preview See a Problem? Thanks for telling us about the problem. Return to Book Page. Preview — Fortune’s Formula by William Poundstone. In 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. Together they applied the science of information theory—the basis of computers and the Internet—to the prob In two Bell Labs scientists discovered the scientific formula for getting rich.
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. Thorp took the “Kelly formula” to Las Vegas. They realized that there was even more money to be made in the stock market.
Fortune’s Formula : William Poundstone :
Thorp used the Poundsone system with his phenomenonally successful hedge fund, Princeton-Newport Partners. Shannon became a successful investor, too, topping even Formu,a 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 Fortune’s Formula will convince you that he was right. Paperbackpages. To see what your friends thought of this book, please sign up.
To ask other readers questions about Fortune’s Formulaplease sign up. Lists with This Book. Aug 21, Gwern rated it really liked it. Thorp returned to trading eventually, and in terms of his lifetime performance: Jan 27, Trevor rated it really liked it Shelves: This is a very interesting book and one that explains complicated mathematical and economic ideas beautifully and simply. It is a story that involves gangsters, mathematicians, the founder of information theory, more gangsters and politicians and police both corrupt and, well, even more corrupt.
Then you place your bets according to how certain you are of winning and in a way that also covers you for ALL eventualities. So, if you forttune betting on a horse race you would bet on all of the horses running in that race according to how well you believe each might go.
Generally, in betting situations, the person with the edge is either the house or the stockbroker. No matter if the horse or stock wins or loses, they take their cut.
The book discusses people who have done very well from the stock market and betting on horse races and some of them have done so over a great number of years and despite the market either racing up or falling on its face. All this is very interesting. So, why am I not taking out lots of money from my bank account or borrowing fodmula so I can leverage my bets on stocks or my investments in blackjack?
We like to think so. The problem is a form of selection bias. There is a universal law associated with this — any investing strategy will be certain to fail the moment I put money into it. My service to the poundstoe is to not invest. Some of the poundstine appearances in this book are really what make it — everyone from J Edgar Hoover to Paul Newman have walk on roles and these are often very amusing.
I loved the gangster who complained about the number of horse races he had to fix to buy off Hoover. The descriptions of casinos in the s in the US — particularly if you had the audacity to actually win in them — was compellingly frightening. Not unlike The Godfather movies. But the most interesting thing was something I never knew at foormula. Do you know in where HAL is having his brain slowly shut down and fkrmula reverts to his childhood?
The idea behind getting a computer to sing a song is really interesting too. The guy programming the voice is very familiar with it — so can understand what it is saying, but probably not the person who is first introduced to the fortunne voice. Sorry, need to stop soon, but have to say this — this is the inverse of another test I find very interesting. They get people to sit opposite each other and they give one of them a pencil and that person has to tap out songs they know — no humming or singing along, just tapping the pencil to the tune of the song.
Then they ask the person who is doing the tapping poudstone confident they are that the person listening will be able to guess the song — generally people say they are very confident. After all, they have the tune with full pokndstone and four part harmonies playing in their head. I did this in a class this year and it was really fun. I asked a kid to tap out the Australian National Anthem and I think someone guessed it poundsone happy birthday — you should have seen the kids face who had done the tapping.
Much the same argument is made in this book as in Fooled By Randomness — that is, if you are going to bet you need to expect the improbable, because the improbable is never as improbable as you might like to think.
In maths talk — 20 gormula events happen all the time. Good luck with that. View all 6 comments. Aug 01, Todd N rated it it was amazing Shelves: This is one of the best books I have read in a long time and the perfect book to read after The Information by James Gleick. The title and subtitle are pretty overblown and don’t really indicate what the book is about. The “fortune’s forumula” referred to in the title is pretty dang interesting though — the Kelly criteria, which is the optimal percentage that should be wagered given the odds.
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I didn’t realize that there even was a optimal bet, but it turns out that overbetting is actually worse t This is one of the best books I have read in a long time and the perfect book to read after The Information by James Gleick. I didn’t realize that there even was a optimal bet, but it turns out that overbetting is actually worse than underbetting. I guess this is intuitive if one sits down and thinks about it, but it’s way cooler that it can be mathematically proven.
Anyway, this Kelly bet is the thread that very loosely runs through the wide-ranging and fascinating stories in this book.
It begins with information theory and my hero Claude Shannon but soon settles on an even more interesting genius named Ed Thorp: In fact, he invented card counting and used an early IBM mainframe to analyze blackjack and prove that card counting could be used to change the odds of the game in favor of the player instead of the house. He wrote a research paper about this, toning down the title somewhat to increase its chances of being published.
Then he reworked it into a book called Beat Formual Dealer. There are many interesting side stories in this book, like when Mr. Thorp and a mob-connected guy fly to Nevada to test out fromula system, or when he and Claude Shannon try to build a device for winning at roulette, or how a parking lot company also mob-connected became Time Warner. Then it gets interesting as any book about mathematics and science I have read. It makes a connection between information theory and finance that never even remotely crossed my mind even though I have spent a lot of time thinking about both.
When the efficient market hypothesis was influencing the field of finance, Mr. Thorp grasped that the math is very similar to information theory. It turns out that a random walk is not terribly different from a compressed signal in noise, at least from a mathematical point of view.
In fact, Thorp was able to work out the Black Scholes Merton formula for pricing options which led to the Nobel prize, by the way long before their paper was published.