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.
The full Amazon URL is: https://www.amazon.com/review/R1NF61HVIRI05/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv
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