Thursday, February 2, 2017

My Amazon Review of Edward O. Thorp's "A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market"

A Quant before his Time

Ed Thorp has written a rather enjoyable autobiography about a math/science nerd kid from depression Chicago who moved with his parents to Southern California in the 1940s where they found work in the war plants. Who would have predicted that a kid who made nitroglycerin in the family refrigerator and placed red dye in a the Long Beach municipal swimming pool would grow up to invent card counting for blackjack and become a pioneer in quantitative finance.

After receiving a Ph.D. in mathematics in 1958 from UCLA Thorp moved on to post-doctoral research at M.I.T. There he would write an apparently obscure paper for the Proceedings of the National Academy of Sciences (Jan. 1961) entitled “A Favorable Strategy for Twenty-One” that would evolve into his best-selling book “Beat the Dealer.” Nevertheless the paper attracted press notice and the attention of Manny Kimmel, a mob-connected businessman from New Jersey. In an amusing part of the book Thorp discusses how Kimmel showed up at his modest rental house in Cambridge in a Cadillac with his two blond “nieces” dressed in mink coats. Kimmel would go on to backing Thorp in his adventures in Reno and Las Vegas. Once the casinos caught on to his successful gambling strategy he became a persona non grata and was physically threatened. However the secret was out and Las Vegas became inundated with Thorp card counters, one of whom was the famous Pimco manager to be, Bill Gross.

Also at M.I.T., Thorp would work with information science guru, Claude Shannon. Together they would invent the first wearable computer. Its purpose: to beat roulette, which it did. After M.I.T. Thorp ultimately moved on to U.C. Irvine where he became interested in the ultimate casino the financial markets. During this time I had the pleasure of casually meeting him in a few academic settings.

Thorp became interested in the pricing of warrants, options and convertible securities. He intuitively developed what was later to be formally derived as the Nobel Prize winning Black-Scholes Model. It was a money maker and Thorp formed Princeton-Newport Partners (PNP) to capitalize on his expertise.  PNP had a great run from the early 1970s until the late 1980s when it closed down after being peripherally involved in the insider trading scandals involving Drexel Burnham. Along the way Thorp and team developed the trading strategy of statistical arbitrage which is utilized by quant shops to this day. He also mentored several people who would go on to become the hedge fund titans of today.

The last quarter of the book is devoted to his political and life philosophy and his approach to charitable giving. Thorp is a very likable person and his autobiography is a good read.

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