Edward O. Thorp: The Man Who Beat the Dealer, and then Wall Street

The life of mathematics professor turned investor Ed Thorp can be described as nothing short of extraordinary. A child of the Great Depression era, Thorp grew up in a family which struggled to make ends meet: never in his wildest dreams could he imagine that he would go on to become a professor at MIT, discover how to beat the house in blackjack, invent the world’s first wearable computer, and make a fortune as a hedge fund manager on Wall Street, all in one lifetime.

From Rags to Science at MIT – and Making Blackjack History
Thorp grew up with in a loving yet financially deprived household; his parents often worked overtime to provide their family with the basics, but always wanted to make sure that their child would receive a proper education. Their son demonstrated signs of genius as well as a particular love for science from an early age, having taught himself chemistry and how to launch rockets. He later went on to enter a science competition in order to win a scholarship – the only way he could afford an education at an elite school.

His plan worked and he found himself in Berkeley, and later on his way to a Ph.D. in Mathematics in UCLA. It was there that he discovered his love for gambling, which later transformed into a love for investing – as he considers that the two share many elements. During his time as a post-doc researcher at UCLA and MIT, Thorp used his flair in probabilities and statistics to invent a mathematical system that would allow players to beat the house advantage at blackjack and even the odds – a feat that was until then considered impossible and earned him a place at the Blackjack Hall of Fame. He wrote a book about his findings in 1962, called Beat the Dealer: A Winning Strategy for the Game of Twenty-One; his strategy advice and theories were so well received that the book quickly became a best-seller. Blackjack players worldwide adopted his approach, and used the mathematical charts that he developed with the use of an IBM computer to increase their chances at winning – but casinos soon took wind of the success of his approach and amended the rules of the game in an effort to disrupt his strategy.

Yet his legacy remains and spills over to pop culture and entertainment, too, as documented by Hollywood: in a scene of the blockbuster movie 21, starring Kevin Spacey and Kate Bosworth, inspired by the real life story of a team of brilliant MIT students who played blackjack in order to fund their way through college (and made extraordinary winnings), protagonist Ben Campbell (Jim Sturgess) is seen reading Thorp’s book. Thorp also made history in information technology in the process: along with fellow mathematician Claude Shannon, he invented a device in the 1960s that is considered by MIT to be the world’s first wearable computer. But Thorp himself soon set his sight elsewhere: Wall Street was his next stop and the finance business was on his mind.

A Gambler who Despises Chance: How Thorp Won Over Wall Street

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In fact, Thorp considers gambling as a prelude to investing, as he believes that the two are intertwined and can teach you a lot about each other – he is of the opinion that gambling can provide the ideal ground to test theories that he would later apply to stock investment, with marvelous results. He founded his first firm, Convertible Hedge Associates, in 1969 – it was later converted into Princeton-Newport Partners in 1974, and in 1989 he left to start a smaller firm that would allow him better control, Edward O. Thorp & Associates.

By testing out the same principles he used in gambling, Thorp managed to become one of the most successful and reliable hedge fund managers on Wall Street: in 1998, his firm saw a 47% return and just 5 years later it rose to more than 59%, making as many as 3,000 transactions per day. But Thorp does not associate investing – or gambling, for that matter – with high risk, quite the opposite: he uses math, logic, and probabilities to make sure that he keeps his returns high and his losses low. If anything, he despises chance games; he alleges that he never even bought a lottery ticket. He must be onto something because, in his 30 years of trading, he consistently managed to reach 20% annual returns – or more.

In his new book, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market, Thorp himself, now aged 84, looks back at his extraordinary life and financial adventures – and few people can say they have achieved as much as he has, with all the twists and turns of his journey.

Editorial References:
edwardothorp.com/a-man-for-all-markets/
betway.com/blackjack-history
ace-ten.com/blackjack-strategy/

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