Playing blackjack in Manhattan
Washington Examiner| September 19 '05
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"Fortune's Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street," by William Poundstone \ Hill and Wang, $27
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By Robert Ferrigno
William Poundstone is a prodigious researcher of the odd but interesting. His previous books include "Big Secrets" and "Bigger Secrets," in which Poundstone delves into Colonel Sanders' super-secret herbs and spices (mostly pepper and MSG) that make KFC an international brand and whether Walt Disney's cryogenically preserved body is really in a hidden room of Snow White's castle. (Alas, it's not.)
"Fortune's Formula," however, is a much more ambitious undertaking, a sweeping historical account of underpaid Massachusetts Institute of Technology whiz kids turning probability and information theory into a cash machine. It's populated by mean-street gangsters, Wall Street hustlers, Rudolph Giuliani, Michael Milken and two ego-mad Nobel Prize-winning economists whose hubris precipitated the biggest hedge-fund bailout in history.
The story starts in the early 1960s, when two MIT professors, Ed Thorp and Claude Shannon, decided to test their mathematical insights. What better laboratory than Las Vegas, a multibillion-dollar city built on a 3 percent house advantage? Being true scientists, Thorp and Shannon took their wives, their computations and a street-smart gambler named Manny Kimbell to Sin City for field research. Counting cards in blackjack was relatively easy for Thorp, who had a photographic memory and he and Shannon used the risk-management betting theory proposed by a Bell Labs colleague, John Kelly, to maximize their profits at roulette. (They had actually practiced on a roulette wheel set up in Shannon's basement.)
This is great, gritty stuff, with vivid characterizations, danger of discovery and the beautiful discontinuity of these two brilliant naifs being led through Vegas by Kimbell, a well-connected fellow who first met the professors when he drove up to Thorpe's modest home in a powder-blue Cadillac. Kimbell, of course, arrived with two young and beautiful blondes. The blondes, of course, wore mink.
After burning through Las Vegas, and causing the inevitable casino backlash that made card counting ever more difficult, the professors segued into the biggest casino of them all: Wall Street. Here, they apply John Kelly's risk-management formula, which Poundstone describes as "Fortune's Formula" (G-max = R, where G-max is the gamblers' maximum rate of return and R is the rate of transmission of inside information, whether legal or illegal). Honest money managers used the formula to assess risk. Boesky and Milken used inside information for much of their stock gains and went to prison for it and those two Nobel Prize winners who ran the Long Term Capital Management hedge fund ignored the formula, over-leveraged their financial bets and almost brought down the U.S. economy. Kelly, Thorp and Shannon became wealthy, with Shannon's personal stock portfolio averaging a 28 percent annual return over 30 years, better than Warren Buffett's Berkshire Hathaway fund.
With its tales of big money, colorful characters, RICO act prosecutions, Russian mafia and chapters titled "Welcome to the World of Sleaze," "Why Money Managers Are No Good" and "The Random Walk Cosa Nostra," "Fortune's Formula" should have been a compelling read. But too often Poundstone tacks away from the most interesting part of the story - the people - and spends page after numbing page on charts and graphs showing the intricacies of bond trading and the philosophical feuds of economists. An excerpt: "Bernoulli's function' refers to a logarithmic utility function. As reported by Latane, Savage said that the geometric mean criterion is best for people who have a logarithmic valuation of money and it's 'approximately valid' for everyone else."
Got that? If so, please write and tell me what it means.
The publisher of "Fortune's Formula" must have noticed this, because the jacket mimics a Vegas craps/blackjack layout with chips stacked artfully. In a you-may-already-be-a-winner economy, the book is evidently being touted as a get-rich manual with a secret formula. This approach may sell books, but it will leave many readers disappointed.
Robert Ferrigno's ninth novel, "Prayers for the Assassin," will be published in February.
Washington Examiner| September 19 '05
-------------
"Fortune's Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street," by William Poundstone \ Hill and Wang, $27
-----------------
By Robert Ferrigno
William Poundstone is a prodigious researcher of the odd but interesting. His previous books include "Big Secrets" and "Bigger Secrets," in which Poundstone delves into Colonel Sanders' super-secret herbs and spices (mostly pepper and MSG) that make KFC an international brand and whether Walt Disney's cryogenically preserved body is really in a hidden room of Snow White's castle. (Alas, it's not.)
"Fortune's Formula," however, is a much more ambitious undertaking, a sweeping historical account of underpaid Massachusetts Institute of Technology whiz kids turning probability and information theory into a cash machine. It's populated by mean-street gangsters, Wall Street hustlers, Rudolph Giuliani, Michael Milken and two ego-mad Nobel Prize-winning economists whose hubris precipitated the biggest hedge-fund bailout in history.
The story starts in the early 1960s, when two MIT professors, Ed Thorp and Claude Shannon, decided to test their mathematical insights. What better laboratory than Las Vegas, a multibillion-dollar city built on a 3 percent house advantage? Being true scientists, Thorp and Shannon took their wives, their computations and a street-smart gambler named Manny Kimbell to Sin City for field research. Counting cards in blackjack was relatively easy for Thorp, who had a photographic memory and he and Shannon used the risk-management betting theory proposed by a Bell Labs colleague, John Kelly, to maximize their profits at roulette. (They had actually practiced on a roulette wheel set up in Shannon's basement.)
This is great, gritty stuff, with vivid characterizations, danger of discovery and the beautiful discontinuity of these two brilliant naifs being led through Vegas by Kimbell, a well-connected fellow who first met the professors when he drove up to Thorpe's modest home in a powder-blue Cadillac. Kimbell, of course, arrived with two young and beautiful blondes. The blondes, of course, wore mink.
After burning through Las Vegas, and causing the inevitable casino backlash that made card counting ever more difficult, the professors segued into the biggest casino of them all: Wall Street. Here, they apply John Kelly's risk-management formula, which Poundstone describes as "Fortune's Formula" (G-max = R, where G-max is the gamblers' maximum rate of return and R is the rate of transmission of inside information, whether legal or illegal). Honest money managers used the formula to assess risk. Boesky and Milken used inside information for much of their stock gains and went to prison for it and those two Nobel Prize winners who ran the Long Term Capital Management hedge fund ignored the formula, over-leveraged their financial bets and almost brought down the U.S. economy. Kelly, Thorp and Shannon became wealthy, with Shannon's personal stock portfolio averaging a 28 percent annual return over 30 years, better than Warren Buffett's Berkshire Hathaway fund.
With its tales of big money, colorful characters, RICO act prosecutions, Russian mafia and chapters titled "Welcome to the World of Sleaze," "Why Money Managers Are No Good" and "The Random Walk Cosa Nostra," "Fortune's Formula" should have been a compelling read. But too often Poundstone tacks away from the most interesting part of the story - the people - and spends page after numbing page on charts and graphs showing the intricacies of bond trading and the philosophical feuds of economists. An excerpt: "Bernoulli's function' refers to a logarithmic utility function. As reported by Latane, Savage said that the geometric mean criterion is best for people who have a logarithmic valuation of money and it's 'approximately valid' for everyone else."
Got that? If so, please write and tell me what it means.
The publisher of "Fortune's Formula" must have noticed this, because the jacket mimics a Vegas craps/blackjack layout with chips stacked artfully. In a you-may-already-be-a-winner economy, the book is evidently being touted as a get-rich manual with a secret formula. This approach may sell books, but it will leave many readers disappointed.
Robert Ferrigno's ninth novel, "Prayers for the Assassin," will be published in February.