Episode 110 ... Edward Thorp (65:15)

Ham radio license at age 13
Fascinated with all things science at age 10, 11
Born in 1932
Sold Kool-aid to WPA workers, turned 5 cents into 6 cents
Early reader, loved books
Started talking in full sentences
Precocious youth
Learned how to make gunpowder from encyclopedia
Parents worked in War Industry, kids weren't supervised, family very poor
Delivered newspapers, bought chemicals from corner druggist
Won scholarships to fund education
Studied chemistry at UCLA
Switched to physics, working on PhD
Switched to math, got his PhD in two years instead
Got job at MIT teaching, spent two years there
Wife hated Boston winters, moved to New Mexico, then UC Irvine
Independent thinker
Interested in whether roulette wheels could be gamed
Found out people playing blackjack and running games didn't understand what they were doing
MIT had an IBM 704 computer
Taught himself Fortran 2, early 1960, test his card counting ideas
Saw how to beat blackjack in multiple ways from computer results
Saw blackjack as a math problem
Bet big when you have an edge, bet small when you don't
Everyone thought he was a crank
Casinos said they'd send a cab for him
Manny Kimmel wanted to bankroll Thorp
Kimmel owned parking lots in NYC
Didn't know Kimmel was mob-connected
Kimmel an experienced gambler
Doubled $10,000 bankroll on their first trip to Vegas
Thorp more interested in academics than gambling
Casinos continued to scoff, so he decided to write a book about it
April Fool's Day 1964, changing the rules of blackjack, no doubling down , no pair splitting
Eventually rescinded those rules
Still are people who make a living counting cards
Thorp never interested in money, liked to be around smart people who knew a lot
Thorp not a conventional guy, unique thinker, Depression-era type of man [vanishing bunch, alas]
People steal your ideas so he published quickly
Claude Shannon sponsored his paper for National Academy
Claude Shannon was a gadgeteer ... wanted to help build wearable computer to beat roulette
1950s terrible in casinos, 1960s awful, same in 1970s -- mafia violence
Casinos improved in 1980s when they went corporate
Played baccarat, won regularly, they drugged his drinks
Also tampered with his car so accelerator stuck -- apparently tried to kill him off
Casino owners hated Thorp and card counters in general, wanted to kneecap him
Money made from gambling and book sales, tried to invest it, but didn't do well
Studied investing all summer 1964
Discovered warrants in 1965
Figured out how to price warrants, buy warrant and short stock, or buy stock and sell warrant
Wrote a book about his warrant findings called Beat the Market
Beat the Market inspired Black and Scholes, pricing uncertain payoffs
1973 Black Scholes paper on options pricing, Thorp says he had exact formula years earlier
CBOE opened in early 1970s, options finally tradeable on an exchange
Playing poker or blackjack great training for investors or traders
"An edge" -- winning money at a fairly predictable rate
"Mathematical Expectation"
Managing your bankroll -- gambling is the master teacher
Kelly Criterion -- maximizing expected growth
Play 100 hands an hour, for 100 hours, that's 10,000 hands -- a lot of bets
"Maximum Expected Return"
KC a compromise between timid betting and overly aggressive betting
Find a situation where you have an edge, use Kelly Criterion to manage your bet size
Warren Buffett on one end of having an edge, HFT on the other end
Don't pursue money or success ... do what you love and enjoy, then money and success will follow
A Man for All Markets -- a memoir ... what's important in life
Don't just pile up money, enjoy the people you love