#222 Ed Thorp (My personal blueprint)

**David Senra** (0:00)
I want to tell you about a one time only limited event that I don't think you're going to want to miss. I am doing a live show with Patrick O'Shaughnessy from the Invest Like the Best podcast in New York City on October 19th. Patrick has interviewed over 300 of the world's best investors and founders for his podcast. I've read over 300 biographies of history's greatest entrepreneurs for my podcast. We'll be talking about what we learned from seven years of podcasting, sharing our favorite ideas and stories, and doing a live Q&A. There will also be special event-only swag. If you live in New York City, I think it's a no-brainer. But if not, I think it's a great excuse to fly in. I've already heard from a bunch of people that bought tickets, they're flying in from other cities. Some people are flying in from other countries. That's setting the bar really high, so I will have at least four shots of espresso or four energy drinks before or during the show so we can make it a night that you'll never forget. If you're interested in attending this unique live event, I will leave a link down below. I highly recommend you get your tickets today, and I hope I get to see you in New York on October 19th. Ed Thorp's memoir reads like a thriller, mixing wearable computers that would have made James Bond proud, shady characters, great scientists, and poisoning attempts.
The book reveals a thorough, rigorous, methodical person in search of life, knowledge, financial security, and not least of all, fun. Thorp is also known to be a generous man, intellectually speaking, eager to share his discoveries with random strangers. Yet he is humble. He might qualify as the only humble trader on planet Earth. So unless the reader can reinterpret what's between the lines, he or she won't notice that Thorp's contributions are vastly more momentous than he reveals.
Why? Because of their simplicity, their sheer simplicity. For it is the straightforward character of his contributions and insights that made them both invisible in academia and useful for practitioners.
My purpose here is not to explain or summarize the book. Thorp, not surprisingly, writes in a direct, clear, and engaging way. I am here as a trader and a practitioner of mathematical finance to show its importance and put it in context for my community of real world risk takers.
That context is as follows. Ed Thorp is the first modern mathematician who successfully used quantitative methods for risk taking, and most certainly, the first mathematician who met financial success doing it. 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 co-conspirator than the great Claude Shannon, father of information theory. He estimated a typical edge of roughly 40% 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 is 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, the originator of the famous Kelly Criterion, which is a formula for placing bets that we discuss today because Ed Thorp made it operational. A bit more about simplicity before we discuss dosing. For an academic judged by his colleagues, rather than the bank manager of his local branch or by his tax accountant, a mountain giving birth to a mouse after huge labor is not a very good thing. They prefer the mouse to give birth to a mountain. It is the perception of sophistication that matters. The more complicated, the better. The simple doesn't get you citations that bring the respect of university administrators as they can understand that stuff, but not the substance of real work. Ed was initially an academic, but he favored learning by doing with his skin in the game. When you reincarnate as a practitioner, you want the mountain to give birth to the simplest possible strategy, and one that has the smallest number of side effects, the minimum possible hidden complications. Ed's genius is demonstrated in the way he came up with very simple rules in Blackjack. Instead of engaging in memory-challenging card counting, something that requires one to be a savant, he crystallizes all of his sophisticated research into simple rules. Go to the Blackjack table. Keep a tally. Start with zero. Add one for some strong cards, minus one for weak ones, and nothing for others. It is mentally easy to just bet incrementally up and down. Bet larger when the number is high, smaller when it is low. And such a strategy is immediately applicable by anyone with the ability to tie his shoes or find a casino on a map.