Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

by William Poundstone

Book Overview

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.

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• Format: Paperback
• Language: English
• ISBN: 0809045990
• ISBN13: 9780809045990
• Release Date: September 2006
• Publisher: Hill & Wang
• Length: 408 Pages
• Weight: 0.85 lbs.
• Dimensions: 1.1" x 5.5" x 8.2"

Customer Reviews

Waste of time.

No information that was actually helpful to an investor. Seek elsewhere if you are looking for strategy on investing. It was a complete waste of money and time with no reward to the investor.

Fun and Informative

Yes, perhaps the book's title is a bit misleading. Those who gave bad reviews to the book may have been looking for a get rich quick formula to beat the market or the casinos. The book focuses on the Kelly criterion and also gives quite a bit of attention to the efficient market hypothesis. The strength of the book is in its portrayals of the characters involved in the stories behind the Kelly Criterion and Efficient Market Theory. Admittedly, at times it was a stretch to connect some of the players in this drama to the Kelly Criterion or the Efficient Market Hypothesis. Rudy Guiliani is one of several people in the book who are quite tangential to the main story line. However, I found this not to be a weakness of the book. Indeed, it enhanced my enjoyment of the story. Those who are looking for a hard core mathematical examination of some of the topics of the book will be disappointed. As will those who are looking for a quick how-to in applying some of the theories. However, the vast majority of people will enjoy getting an inside look at some of the personalities involved in the development of these concepts and will love seeing how some of the theories held up in the "real world".

Against James Pragma's review

James pragma's review below is so bad that i felt the need to write my own review. let me clarify some of what James gets wrong, and also clarify what the book is actually about. James obviously misunderstood the book (and that is not the writer's fault in this case). Poundstone clarifies the Kelly betting system which was originally applied to card-counting but has uses beyond it. the central example and climax of the book is how the kelly betting system and the controversy surrounding it in light of efficient markets theory can help us explain the tragic blow up of a powerhouse hedge fund. the book is about risk, how to manage risk and avoid ruin. that has nothing to do with card counting as a system to get an advantage over the house (Which everybody knows about), the point is that Kelly invented a way to maximize long-term reward and minimize risk. but did he? that's the question. James Pragma's review is nonsense. he failed to understand the book. in addition to what i say about, Poundstone gives us the history of math, information theory and gambling as it relates to the core story i mention above. it was a fun, informative book.

Useful and Interesting

Very interesting to read and very useful to know. The Kelly Criterion applies to all variants of investments (gambling, stock market, horse racing, etc). This book explains the history of the Kelly Criterion and academic misunderstanding of it. The only problem with the book is that it did not explore the daily applications of the Kelly formula. Many readers would finish the book and ask: So how do I use this? The book also fail to explain how to adapt the Kelly concept to situations with multiple outcome states rather than only Win or Lose. Support for multiple outcome states is essential in real-life applications of Kelly Criterion [...] Overall, the book is great as an introduction to money management.

Should be on the 'must read' list for every trader

If you have ever heard of the Kelly Criteria for position-sizing, or wondered if Optimal F is a good way to manage risk, this book is for you. In a narrative, story-telling style that is much easier reading than a mathematical, economic, or statistical textbook, the author covers a whole range of interesting and informative theories that are relevant to trading and investing. Knowing that a trader who uses the Kelly Formula to maximize return always has a 50% chance of losing 50% (or X% chance of losing (100-X)% generally) of their capital may be an eye-opener for many traders. Although this book will not tell you how to make money trading, it will generate more than a handful of useful areas of research, and get you thinking about risk management rather than entry signals. Covering a multitude of financial, economic, and mathematical geniuses, this book has many interesting side-stories and anecdotes that are amusing, interesting and thought-provoking. The majority of this book is not strictly about trading, but all of the ideas have some application to trading and investing if you think hard and long enough.

Ed Thorp is a true investment and math genius.

This is an excellent book about the discovery of the Kelly formula that is unknown outside gambling. This story has three protagonists. Two of them were scientists working at Bell Labs: Claude Shannon, a genius polymath who developed information theory; and John Kelly, a maverick genius, who is directly responsible for the development of Kelly's formula. The third one is a brilliant MIT mathematician, Ed Thorp. Ed Thorp tested the Kelly formula in both gambling and investing. Also, he came up with an options formula before Fischer Black and Myron Scholes. His formula missed a risk-free rate component due to the structure of the market at the time. As a result, Ed Thorp remained in obscurity while Black and Scholes became famous. Ed Thorp succeeded in deriving superior returns in both gambling and investing. But, it was not so much because of Kelly's formula. He developed other tools to achieve superior returns. In gambling, Ed Thorp succeeded at Black Jack by developing the card counting method. He just used intuitively Kelly's formula to increase his bets whenever the odds were in his favor. Later, he ran a hedge fund for 20 years until the late 80s and earned a rate of return of 14% handily beating the market's 8% during the period. Also, his hedge fund hardly lost any value on black Monday in October 1987, when the market crashed by 22%. The volatility of his returns was far lower than the market. He did this by exploiting market inefficiencies using warrants, options, and convertible bonds. The Kelly formula was for him a risk management discipline and not a direct source of excess return. Ed Thorp's career as a hedge fund manager was temporarily cut short. This was due to his fund being involved in a tax-avoiding securities scheme with Drexel Burnham. Thorp was not guilty; but, the fund had to be liquidated. The author stated many of Milken wrongdoings. One included getting large equity positions attached to the junk bonds he issued. The companies thought they were issuing convertible bonds. However, the equity component went straight into Milken's pocket as he sold the bonds to investors as high yield debt with no equity attached. Ed Thorp rebounded from this mishap and started a second hedge fund in 1994. Thorp continued reaping above market return. As the author states, Ed Thorp's genius consists in "...his continuous ability to discover new market inefficiencies ... as old ones played out." Ed Thorp closed this second fund in 2002. He is now independently exploring inefficiencies in gambling. Claude Shannon amassed large wealth by recording one of the best investment records. His performance had little to do with Kelly's formula. Between 1966 and 1986, his record beat even Warren Buffet (28% to 27% respectively). Shannon strategy was similar to Buffet. Both their stock portfolios were concentrated, and held for the long term. Shannon achieved his record by holding mainly three stocks (Teled