A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market
Nassim Taleb Edward Thorp

Ended: May 4, 2017

I was largely self-taught and that led me to think differently. First, rather than subscribing to widely accepted views—such as you can’t beat the casinos—I checked for myself. Second, since I tested theories by inventing new experiments, I formed the habit of taking the result of pure thought—such as a formula for valuing warrants—and using it profitably. Third, when I set a worthwhile goal for myself, I made a realistic plan and persisted until I succeeded. Fourth, I strove to be consistently rational, not just in a specialized area of science, but in dealing with all aspects of the world. I also learned the value of withholding judgement until I could make a decision based on evidence.
Thorp’s method is as follows: He cuts to the chase in identifying a clear edge (that is something that in the long run puts the odds in his favor). The edge has to be obvious and uncomplicated. For instance, calculating the momentum of a roulette wheel, which he did with the first wearable computer (and with no less a coconspirator than the great Claude Shannon, father of information theory), he estimated a typical edge of roughly 40 percent per bet. But that part is easy, very easy. It is capturing the edge, converting it into dollars in the bank, restaurant meals, interesting cruises, and Christmas gifts to friends and family—that’s the hard part. It is the dosage of your betting—not too little, not too much—that matters in the end. For that, Ed did great work on his own, before the theoretical refinement that came from a third member of the Information Trio: John Kelly, originator of the famous Kelly Criterion, a formula for placing bets that we discuss today because Ed Thorp made it operational.
As a side plot, Ed discovered what is known today as the Black-Scholes option formula, before Black and Scholes (and it is a sign of economics public relations that the formula doesn’t bear his name—I’ve called it Bachelier-Thorp). His derivation was too simple—nobody at the time realized it could be potent.
Having an “edge” and surviving are two different things: The first requires the second. As Warren Buffet said: “In order to succeed you must first survive.” You need to avoid ruin. At all costs.
As we saw, academics are paid by administrators via colleagues to make life complicated, not simpler.
The Kelly-Thorp method requires no joint distribution or utility function. In practice, one needs the ratio of expected profit to worst-case return—dynamically adjusted (that is, one gamble at a time) to avoid ruin. That’s all.
A trait that showed up at about this time was my tendency not to accept anything I was told until I had checked it for myself.
This damaged his self-esteem, which, as I came to understand later, is an absolute no-no in human relationships unless you don’t mind creating an inveterate enemy.
In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them.
My thoughts then were much like I expected his to have been: that acknowledgment, applause, and honor are welcome and add zest to life but they are not ends to be pursued. I felt then, as I do now, that what matters is what you do and how you do it, the quality of the time you spend, and the people you share it with.
This plan, of betting only at a level at which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with a calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger.
Offering explanations for insignificant price changes is a recurrent event in financial reporting. The reporters often don’t know whether a fluctuation is statistically common or rare. Then again, people tend to make the error of seeing patterns or explanations when there aren’t any, as we’ve seen from the history of gambling systems, the plethora of worthless pattern-based trading methods, and much of story-based investing.