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

Average customer rating: 4.0

Against James Pragma's review
More applicable to investors than gamblers!
Entertaining anecdotes of colorful characters and a well-explained math idea
An unfortunate formula for many ...
Hard to Stick With, but Interesting True Story

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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
William Poundstone
Manufacturer: Hill and Wang
Product Group: Book
Binding: Paperback
ASIN: 0809045990
2006-09-19

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Amazon.com

<I>Fortune's Formula</I> is a fascinating study of the connections between such seemingly unrelated topics as gambling, information theory, stock investing, and applied mathematics. The story involves the stunning brainpower of men such as MIT professor Claude Shannon, who single-handedly invented information theory, the science behind the Internet and all digital media; Ed Thorpe; and John Kelly of Bell Laboratories, who developed the "Kelly criterion," a now-legendary investment strategy for maximizing growth while controlling risk. Initially, Shannon and Thorpe took Kelly's theory to Las Vegas and applied it to roulette and blackjack. Later, they took it to Wall Street and cleaned up--Shannon made a personal fortune while Thorpe created the highly successful hedge firm Princeton-Newport Partners. They both discovered that Kelly's system was particularly effective when applied to arbitrage (minute price differences that result from market inefficiencies). As Poundstone ably demonstrates, the merits of Kelly's criterion are still hotly debated today.

Poundstone has a tendency to meander in his writing, but his asides are so revealing and interesting that they add, rather than detract, from the narrative. The book also includes a cast of fascinating and colorful characters as varied as Ivan Boesky, Warren Buffet, Rudolph Giuliani, and notorious mobsters such as Bugsy Siegel and Meyer Lansky. In explaining the lasting impact of the work done by Shannon, Thorpe, and Kelly, Poundstone even explains Kelly's system for those wishing to follow his formula, offering readers both theoretical and practical lessons. Whether viewed as a how-to guide or straight scientific and financial history, <I>Fortune's Formula</I> proves an entertaining and illuminating analysis of "the most successful gambling system of all time." <I>--Shawn Carkonen</I>

Book Description

<div><div>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.

Shannon and MIT mathematician Edward O. Thorp took the “Kelly formula” to Las Vegas. It worked. They realized that there was even more money to be made in the stock market. Thorp used the Kelly system with his phenomenonally successful hedge fund, Princeton-Newport Partners. Shannon became a successful investor, too, topping even Warren 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.</div></div>

Customer Reviews:

Against James Pragma's review.......2007-06-11

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.

More applicable to investors than gamblers!.......2007-06-06

First off, for a book that sometimes can get just a little technical and mathy... the author does a great job of tying in the history of gambling in the country, and how that industry drove some key technologies. I found the historical perspective quite entertaining.

Second - if you want a 'beat the casino's' gambling system, you'll be quite disappointed. The book reviews the 'Kelly System' to bet sizing once a gambler has an expected 'edge' over casino's. But as we all know, there is no edge at any casino game, unless you cheat. And, although Kelly and friends tried to cheat back in the days (with counting and roullette physics), they don't teach you how.

Third - if you are a serious investor in stocks, the book has a refreshing and persuasive approach to determine a) What bets are worth taking, and b) How to size those bets to maximize compound returns. There are almost no good books written on that second subject, which makes this a must read!

Entertaining anecdotes of colorful characters and a well-explained math idea.......2007-05-28

"Fortune's formula" is the author's cute name for what mathematicians call the Kelly criterion. Much of the book is entertaining episodic anecdotal history of characters like Shannon, Kelly, Thorp, Milken, Boesky and Long Term Capital Management. The formula-free discussion of mathematical aspects of the Kelly criterion is rather good (to my taste as a professional mathematician). Entertaining account of dispute between the proponents of Kelly (math types) and economists led by Samuelson who viewed it as too risky even in the long run. Memorable slogan: 100% Kelly strategy marks the boundary between aggressive and insane investing.

To lecture briefly ..... in a hypothetical gambling or investment situation where you have a range of choices to bet on/invest in, and where you know the correct probability and profit/loss from each possible outcome, the Kelly criterion tells you how to split your investment between the different choices. The point of the formula is to take into account the fact that (when investing all your money) a 20% gain one year followed by a 20% loss next year works out as a 4% loss, not zero. Its use in splitting beween risky and safe investments is uncontroversial. People get emotional about the "efficient market hypothesis" that you cannot assess probabilities for future stock prices more accurately than the consensus probabilities reflected in current prices; but this is an empirical question, like asking "can you beat Tiger Woods at golf", and of course has the same answer for most people. Poundstone conveys such concepts pretty well.

An unfortunate formula for many ..........2007-05-27

To those of you mildly interested in the markets or Las Vegas, forget about this book. For those of you rabidly interested in gambling, don't even bother trying to understand this book. For those of you who failed math in high school, ignore this book and take up real estate sales, automobile sales or torte reform ... For those few still standing, interested in possibilities and probabilities, able to fully comprehend the deep ramifications of simple algebra and are interested in improving their lives from an economist's stand point, read this book several times before you begin to put these ideas into practice. Contained here in are the keys to the compound interest treasure chest ... but it will take vast patience and an understanding of probabilities and number theory to turn those keys.
Mr. Poundstone's anecdotes do make for fascinating reading but the underlining themes of easy wealth through racetrack betting, card playing and out guessing casino shills are not for the poorly financed, the technologically misinformed or the faint of heart.

Hard to Stick With, but Interesting True Story.......2007-04-18

I'm not a trader, or a scientist, or a mathematician which this book seems to be geared towards. I'm just an average reader who thought this information would be an interesting, casual read. Much of the information was interesting; however this book was not easy to read. It wasn't hard in the sense that I couldn't understand it, but hard in the sense that I felt like I was really pushing myself just to finish the page. Many times it read like theme-less ramblings of poorly written stories.

Much of the book is centered around stories related to the "Kelly Criteria", theory and mathematical equations created for the purpose of "noise reduction" along telephone wires, but later was adapted to use as a betting scheme at the casinos (which did make money at blackjack before multi-deck shoes and reshuffling before the end of the deck - good luck trying it now) and was also adapted to making money on Wall Street in which a lot of money was also made. Many people believe the "Kelly Criteria" can no longer be used effectively because even though the "Kelly Criteria" (when translated correctly to the application) ensure one cannot lose all their money and only will increase with time and patience, it is argued that this system only works due to arbitrage (making money from buying and selling the same thing simultaneously and profiting due to the differences in the prices between bought and sold) and due to the belief that once someone knows about it, it becomes useless because others use it. It is also argued that it still can be used due to people believing that is the case.

My experience with reading the book is as follows: The stories would just ramble on and on amongst short, declarative sentences that appeared to be written like a dry book report from a grade-schooler, and I found myself asking where the author was going with it. Then, sporadically, it would be okay to read as if a different author was writing it. The book see-sawed like that quite often. I liked the information given in the stories, but to compare it with an analogy - I like History and I would like the information from a History Text Book, but I wouldn't want to just sit and read it.

I found myself skipping around a lot, then speed reading over the parts I skipped, because I committed myself to reading it, but I just couldn't bring myself to continue with a casual read.

I do believe the information to be of value and reading this book will provide insightful information on an entertaining true story, but it comes at a cost to a casual reader. You must commit yourself to reading this, because as you will see before you are even done reading the Prologue, it can be painful to stick with it. If you have other books you have been waiting to read, start with those first, then come back to this one.

Ultimately the two stars is because the book was hard to stick with. I guess like the patience needed to use the "Kelly Criteria" described, you need a lot of patience to read this.

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