Fortune’s Formula | William Poundstone

Summary of: Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
By: William Poundstone

Introduction

Dive into the captivating world of mathematics, gambling, and the stock market with ‘Fortune’s Formula’, a book that explores the groundbreaking scientific betting system developed by Claude Shannon and Ed Thorp. This fascinating read highlights the intricacies of the Kelly betting system, which harnessed information theory and proportional bets to revolutionize the art of gambling. Discover the ingenious methods that Shannon and Thorp used to beat the casinos and delve into the secretive triumphs of Princeton-Newport Partners, one of the most successful investment partnerships in history. Unearth the untold stories and complexities of probability, mathematics, and finance that lay at the heart of this drama-filled tale of betting tactics and market mastery.

Claude Shannon: The Father of Digital Communications

Claude Shannon, a researcher at AT&T’s Bell Labs, invented the binary system of zeros and ones to represent the “on” and “off” positions in electrical circuits. His 1948 paper paved the way for cell phones, HDTV, DNA sequencing, and fiber optic cable. Shannon graduated from the University of Michigan, where he had the opportunity to work on a new MIT computer, the Differential Analyzer. Shannon’s exposure to this computer led him to the idea of using electrical circuits to represent numbers, and at the age of 21, he published his results. At Bell Labs, he worked on developing the world’s first encoded wireless telephone, which consisted of a 55-ton computer, an isolation booth, and an air conditioner. After World War II, he published his information theory paper, which transformed the field of digital communications. Shannon’s legacy continues to shape the digital age we live in today.

Beating Blackjack and Betting Big

This book tells the story of Ed Thorpe and Claude Shannon, two individuals who developed a mathematical approach to gambling by beating blackjack and creating the Kelly wagering system. In the late 1950s, Ed Thorpe started his research on making easy money by exploiting flaws in the roulette wheel’s alignment; however, he shifted his focus to blackjack using a system developed by Roger Baldwin and three others who worked for the U.S. Army. While at MIT, Thorpe connected with Claude Shannon, who helped him build a “roulette prediction machine” using a professional roulette wheel. After a few attempts, they abandoned the project due to malfunctioning earphone wires. Nonetheless, Shannon’s full attention ventured into a mathematical approach to gambling. He discovered that serious gamblers optimize their bets based on existing odds and conditions, and that money management is key to long-term success. As a result, John Kelly Jr.’s proportional betting system became the basis of the Kelly wagering system. The Kelly system allowed for proportional bets based on a gambler’s risk capital, ensuring that gamblers always had cash in reserve and could remain in the game longer. The book discusses the history of both gambling systems and how these systems revolutionized the gambling industry.

The Origins of Information Theory

In the mid-20th century, Bell Labs’ Claude Shannon developed “Information Theory” to conserve expensive cable by statistically describing the meaning of compressed messages. Shannon’s theory signaled the dawn of the communication age, influencing modern-day cellular phone applications. The concept’s importance was recognized by Fortune magazine in the 1950s and was explored by artists like Robert Rauschenberg and Andy Warhol. In the mid-1960s, Arthur C. Clarke visited Bell Labs and witnessed a demo of a “singing” computer, which influenced his film 2001: A Space Odyssey, featuring a singing computer called HAL. Shannon’s breakthrough took inspiration from the work of Ralph Hartley and Harry Nyquist, also Bell Labs scientists in the 1920s. Thus, Shannon’s contribution to the field of information transmission ushered in a new era of communication.

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