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FORTUNE’S FORMULA by William Poundstone

FORTUNE’S FORMULA

The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

By William Poundstone

Pub Date: Sept. 14th, 2005
ISBN: 0-8090-4637-7
Publisher: Hill and Wang/Farrar, Straus and Giroux

Is there a secret mathematical equation to beat the stock-market smarties and outsmart the blackjack dealers? There sure is, says this erudite author. You can bet on it.

Poundstone (Carl Sagan, 1999, etc.) offers a simple formula known as the proportional Kelly criterion. Using it, you can never lose your entire bankroll, and you will have a real edge. He touts the system with scholarship and documentation. And it’s all artfully packaged with diverting tales of geniuses and gangsters. There are MIT scholars and Bell Lab theorists like Claude Shannon, Ed Thorp and the eponymous J.L. Kelly, and there are the colorful gamblers and crooks from Vegas to Wall Street like Bugsy Siegel and Ivan Boesky. There’s ambitious young Rudy Giuliani and irascible old Paul Samuelson. The math geeks, con men, arbitrageurs and professors contribute their respective talents to conjectures regarding horse-racing in Hong Kong and hedge-fund management in Princeton. We are given instruction in the arcana of information theory, card-counting, portfolio construction, fat-tail distributions and logarithmic utility. Thus, we are led, quite ingenuously, into B-school notions and economic theory with real math and actual graphs. If the academic medicine gets a bit thick, it goes down quite well with the sugar of entertaining anecdotes. It’s those stories that provide a selective picture of our civilization, a sociological survey of how risk is taken. For a good way to manage risk, Poundstone says, he’s got the horse right here. Its name is Kelly. Readers will have to decide whether to simply bet their beliefs the old-fashioned way or to sign on to the discipline of Kelly’s formula.

Enticing elucidation beneath good humored history.