Edward Oakley "Ed" Thorp is an American mathematics professor, author, hedge
fund manager, and blackjack player best known as the "father of the wearable
computer" after inventing the world's first wearable computer in 1961. He was
a pioneer in modern applications of probability theory, including the
harnessing of very small correlations for reliable financial gain.
He is the author of Beat the Dealer, the first book to mathematically prove, in
1962, that the house advantage in blackjack could be overcome by card
counting. He also developed and applied effective hedge fund techniques in the
financial markets, and collaborated with Claude Shannon in creating the first
wearable computer. Thorp received his Ph.D. in mathematics
from the University of California, Los Angeles in 1958, and worked at the
Massachusetts Institute of Technology from 1959 to 1961. He was a professor of
mathematics from 1961 to 1965 at New Mexico State University, and then joined
the University of California, Irvine where he was a professor of mathematics
from 1965 to 1977 and a professor of mathematics and finance from 1977 to
1982. Computer aided research in blackjack
Thorp used the IBM 704 as a research tool in order to investigate the
probabilities of winning while developing his blackjack game theory,
which was based on the Kelly criterion, which he learned about from the 1956
paper by Kelly. He learned Fortran in order to program the equations needed
for his theoretical research model on the probabilities of winning at
blackjack. Thorp analyzed the game of blackjack to a great extent this way,
while devising card-counting schemes with the aid of the IBM 704 in order to
improve his odds, especially near the end of a card deck that is not being
reshuffled after every deal. = Applied research in Reno, Lake Tahoe
and Las Vegas = Thorp subsequently decided to test his
theory in practice in Reno, Lake Tahoe, and Las Vegas.
Thorp started his applied research using $10,000, with Manny Kimmel, a wealthy
professional gambler and one-time illegal bookie with mob connections,
providing the venture capital. First they visited Reno and Lake Tahoe
establishments where they tested Thorp's theory at the local blackjack tables.
The experimental results proved successful and his theory was verified
since he won $11,000 in a single weekend. He could have won more during
his initial foray in Las Vegas had his uncanny ability at winning not drawn the
unwelcome attention of the casino security, which led to repeated
expulsions from the various premises that he visited that night. Casinos now
shuffle well before the end of the deck as a countermeasure to his methods.
During his Las Vegas casino visits Thorp frequently used disguises such as
wraparound glasses and false beards. In addition to the blackjack activities,
Thorp had assembled a baccarat team which was also winning.
News quickly spread throughout the gambling community, which was eager for
new methods of winning, while Thorp became an instant celebrity among
blackjack aficionados. Due to the great demand generated about disseminating his
research results to a wider gambling audience, he wrote the book Beat the
Dealer in 1966, widely considered the original card counting manual, which
sold over 700,000 copies, a huge number for a specialty title which earned it a
place in the New York Times bestseller list, much to the chagrin of Kimmel
whose identity was thinly disguised in the book as Mr. X.
Thorp's blackjack research is one of the very few examples where results from
such research reached the public directly, completely bypassing the usual
academic peer review process cycle. Moreover, Thorp became one of the very
few applied mathematicians who risked physical harm in verifying a computer
simulation. He has also stated that he considered the whole experiment an
academic exercise. This also marked the first time in the history of computing
that a computer was used as a gambling aid.
In addition, Thorp, while a professor of mathematics at MIT, met Claude Shannon,
and took him and his wife Betty Shannon as partners on weekend forays to Las
Vegas to play roulette and blackjack, at which Thorp was very successful. His
team's roulette play was the first instance of using a wearable computer in
a casino — something which is now illegal. The wearable computer was
co-developed with Claude Shannon between 1960–61. The final operating version of
the device was tested in Shannon’s home lab at his basement in June 1961. His
achievements have led him to become an inaugural member of the Blackjack Hall
of Fame. He also devised the "Thorp count", a
method for calculating the likelihood of winning in certain endgame positions in
backgammon. Stock market
Since the late 1960s, Thorp has used his knowledge of probability and statistics
in the stock market by discovering and exploiting a number of pricing anomalies
in the securities markets, and he has made a significant fortune. Thorp's
first hedge fund was Princeton/Newport Partners. He is currently the President
of Edward O. Thorp & Associates, based in Newport Beach, California. In May
1998, Thorp reported that his personal investments yielded an annualized 20
percent rate of return averaged over 28.5 years.
Bibliography Edward O. Thorp, Elementary Probability,
1977, ISBN 0-88275-389-4 Edward Thorp, Beat the Dealer: A Winning
Strategy for the Game of Twenty-One, ISBN 0-394-70310-3
Edward O. Thorp, Beat the Market: A Scientific Stock Market System, 1967,
ISBN 0-394-42439-5 Edward O. Thorp, The Mathematics of
Gambling, 1984, ISBN 0-89746-019-7 Fortune's Formula: The Untold Story of
the Scientific Betting System That Beat the Casinos and Wall Street by William
Poundstone The Kelly Capital Growth Investment
Criterion: Theory and Practice, ISBN 978-9814293495, February 10, 2011
by Leonard C. MacLean, Edward O. Thorp, William T. Ziemba
See also Black–Scholes
Gaming mathematics Richard A. Epstein
References Sources
Patterson, Scott D., The Quants: How a New Breed of Math Whizzes Conquered Wall
Street and Nearly Destroyed It, Crown Business, 352 pages, 2010. ISBN
0-307-45337-5 via Patterson and Thorp interview on Fresh Air, February 1,
2010, including excerpt "Chapter 2: The Godfather: Ed Thorp"
External links Edward O. Thorp at the Mathematics
Genealogy Project Edward O. Thorp official site
Thorp, Edward entry, Wilmott Wiki Edward O. Thorp & Fortune's Formula