INSTITUTE OF MATHEMATICAL STATISTICS: Mathematician Edward Thorpe beat the casino and earned $800 million on Wall Street
The scientist wanted to solve real problems with the help of science. He first used physics and mathematics in gambling. Then he switched to financial markets, applied a quantitative method of analysis and opened two hedge funds.
Thorp’s book “Beat the Dealer” about winning strategies in blackjack has taken the casino world by storm. With the mathematician and founder of information theory, Claude Shannon, Thorp invented the first portable computer that allowed you to win at roulette. Thorpe also came up with a strategy for counting cards in the card game baccarat.
Thorp is a Wall Street veteran with 50 years of experience. He developed and improved convertible trading strategies and founded two funds: Princeton Newport Partners and Ridgeline Partners. They brought him 20% of the annual profit.
Thorpe is now worth an estimated $800 million.
Childhood, passion for science and love for experiments
Edward Thorpe was born in Chicago in 1932 to military Oakley Glenn Thorpe. In early childhood, Thorp mastered arithmetic: he counted in his mind and calculated square and cube roots. One day he decided to count to a million and fell asleep on the number 32,576. And when he woke up, he continued from where he left off, his mother recalled .
With the outbreak of World War II, the family moved to California, to the town of Lomita near Los Angeles. In high school, Thorpe was most interested in practical classes in radio engineering and electronics, chemistry and physics. He loved to experiment and find out how everything works.
“Practical jokes and experiments were part of my method of studying the sciences. Having understood some theory, I tested it on my own invented experiments, many of which gave me a lot of pleasure. I learned to figure things out on my own, not limited by what teachers, parents, or the school curriculum demanded.”
For example, Thorp made a radio receiver to understand how invisible waves transmit sounds through space. At home, he arranged a chemical laboratory, where he conducted experiments: he produced hydrogen, he himself prepared gunpowder.
He created and tested other explosives: pyroxylin and nitroglycerin. He made bombs from pieces of water pipes, filled them with gunpowder and blew them up in the hills near the house.
In his senior year, Thorp began to think about how to predict the outcome of a game of roulette. He was not into gambling. For him, the task lay in the field of physics: he saw the similarity between a spinning tape measure and a planet orbiting.
When his English teacher Jack Chesson came from Las Vegas and told him that it was impossible to beat the casino, Thorp said that he would do it one day – and he succeeded.
Scientific career and gambling
The key to roulette and blackjack
In 1958, Thorpe received a degree in mathematics from the University of California, Los Angeles (UCLA) and began teaching. In graduate school, he married Vivian Sinetar, she studied at the department of English literature. They lived together all their lives and raised three children.
In 1959, Thorp moved to teach mathematics at MIT. Simultaneously with scientific research, Thorp received answers to questions that interested him – how to win at roulette and blackjack. For example there are new casinos with new roulette or blackjack and you can see all the new stuff on the new casinos website – there are the best Brazilian reviews and a lot of interesting casinos. In 1960-1961, Thorpe and MIT professor Claude Shannon worked together on a winning roulette strategy. They bought a decommissioned roulette wheel and, in the course of experiments , created the first portable computer.
The device, about the size of a pack of cigarettes, was placed in a shoe by one participant. The first time he pressed the button with his toe was when the roulette wheel was started. The second time the wheel made one revolution. The computer calculated the future position of the ball and sent a radio signal to the player. He had a radio under his clothes, from which a thin steel wire went to a speaker in his ear, where the signal was received.
After testing at the casino, Thorp and Shannon were convinced that the system worked. But the computer was technically flawed: the speaker sometimes got out of the ear, and the wires were torn, because of which it was necessary to leave the game. Thorpe and Shannon stopped using it.
Thorp has been thinking about how to win a blackjack (or “twenty-one”) card game since 1958. The researcher noticed that even experienced players do not understand the mathematics that underlies it. He figured he could find a way to consistently win at blackjack.
“It was n’t the money that attracted me to blackjack . I was fascinated by the possibility of finding a way to win with the power of thought from the comfort of my own room. I was also curious to explore the world of gambling, which I knew nothing about at the time.”
During the game, the composition of the deck changes . Which cards are eliminated and which remain affects the advantage of the player or the house. To derive patterns that are beneficial for the player, you need to calculate millions of card combinations. If Thorp did it by hand, on a calculator, he would not have had enough life. But at MIT, he could use the university’s IBM 704.
Thorp found that the more nines, ten (also queens, kings and jacks) and aces left in the deck, the better for the player. He developed several card counting strategies. In 1960, he finally deduced the optimal winning strategy – counting tens.
To understand if he has an advantage, the player monitors the ratio of the number of other cards to tens. There are 16 tens and 36 other cards in a full deck. 36 : 16 = 2.25. If the ratio is less than 2.25 at the time of betting, then there are many tens in the deck – and the player is in a winning position. The smaller the ratio is 2.25, the higher the advantage.
For betting, Thorpe applied the “Kelly Criterion”, which suggests making larger bets when the player has the advantage, and small bets when the house has the advantage.
Under this system, the player usually wins most of the big bets and ends up making a profit, although he can lose most of the small bets in unfavorable situations during the game.
Thorp and the Millionaires vs. the Casino
In 1961, The Boston Globe published an article about Thorpe, a mathematician who knows how to win at blackjack. Thorpe was inundated with letters and offers of financial support to test the casino strategy. Offers reached up to $100,000. Thorpe selected two candidates, multimillionaires from New York.
The first, Emanuel “Manny” Kimmel, owned the Kinney Parking car park network and was previously involved in alcohol smuggling, illegal lotteries and was associated with criminal gangs. The second, Eddie Hand, was Kimmel’s business partner in trucking.
In response to the skeptical attacks of the press in his direction, Thorp decided to prove that his theory worked,
“I decided to go to Nevada, partly to shut up the common and rather annoying ridicule of scientists: “If you’re so smart, why are you so poor?”
After the live meetings and practice games, Thorpe, Kimmel and Hand went to a casino in Reno. There Thorpe tested the tens-counting strategy.
Kimmel and Hand were willing to set aside a $100,000 bankroll—the total capital for the game. But Thorp agreed on $10,000. He didn’t want to risk it because he didn’t know much about the gaming world yet.
A tour of different casinos showed that the strategy worked. In one of the games, Thorpe and Kimmel brought out the table bank for two hours – $ 17 thousand. Of these, Thorpe won $6,000 and Kimmel won $11,000. Thorpe realized that he was losing concentration, left the game and cashed out his chips. Kimmel went on and lost his share.
“For me, blackjack was a game of math, not luck.”
After that, the partners played several more times. As a result, the trip to the casino ended in victory. In 30 hours, the capital of the players grew from $10,000 to $21,000.