Fortune's Formula : The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone http://www.amazon.com/gp/product/08...104-9649550-1062354?s=books&v=glance&n=283155
From Publishers Weekly In 1961, MIT mathematics professor Ed Thorp made a small Vegas fortune by "counting cards"; his 1962 bestseller, Beat the Dealer, made the phrase a household word. With Claude Shannon, the father of information theory, Thorp next conquered the roulette tables. In this prosaic but fascinating cultural history, Poundstone (How Would You Move Mt. Fuji?) tells not only what they did but how they did it. For roulette, Poundstone shows, Thorp and Shannon used a betting scheme invented by Shannon's Bell Labs colleague John Kelly, eventually applying Kelly's technique to investing, resulting in long-term records of extraordinary return with low risk. (Thorp revealed the secret in 1966's Beat the Market, but investors proved harder to persuade than blackjack players.) Many other characters figure into Poundstone's entertaining saga: a forgotten French mathematician, two Nobel Prize–winning economists who declared war on the Kelly criterion, Rudy Giuliani, assorted mobsters, and winners and losers in all types of investing and gambling games. The subtitle is not a tease: the book explains and analyzes Kelly's system for turning small advantages into great wealth. The system works, but requires unusual amounts of patience, discipline and courage. The book is good fun for the rest of us.
Book Description In 1956 two Bell Labs scientists discovered the scientific formula for getting rich. One was mathematician Claude Shannon, neurotic father of our digital age, whose genius is ranked with Einstein's. The other was John L. Kelly, Jr., a Texas-born, gun-toting physicist. Together they applied the science of information theory--the basis of computers and the Internet--to the problem of making as much money as possible, as fast as possible. Shannon and MIT mathematician Edward O. Thorp took the "Kelly formula" to the roulette and blackjack tables of Las Vegas. It worked. They realized that there was even more money to be made in the stock market, specifically in the risky trading known as arbitrage. Thorp used the Kelly system with his phenomenonally successful hedge fund Princeton-Newport Partners. Shannon became a successful investor, too, topping even Warren Buffett's rate of return and using his wealth to drop out of the scientific world. Fortune's Formula traces how the Kelly formula sparked controversy even as it made fortunes at racetracks, casinos, and trading desks. It reveals the dark side of this alluring scheme, which is founded on exploiting an insider's edge. The cast of character spans J. Edgar Hoover, Rudolph Giuliani, Michael Milken and Warren Buffett; Hollywood producers, Wall Street crooks, snarky Nobel Laureates, and the Jewish mob. Fortune's Formula explores a new and surprising side to the Shannon legacy. Based in part on Shannon's previously unseen personal records as well as interviews with both of Shannon's wives, Thorp, and many others, it is the first full-length treatment of a subject that is changing ideas about finance. Claude Shannon believed it was possible for a smart investor to beat the market--and Fortune's Formula will convince you he was right. About the Author William Poundstone is the author of nine nonfiction books, two of which (Labyrinths of Reason: Paradox, Puzzles, and the Frailty of Knowledge and The Recursive Universe: Cosmic Complexity and the Limits of Scientific Knowledge) were nominated for the Pulitzer Prize.
http://www.americanscientist.org/te...etail/assetid/47321;jsessionid=aaa_u5NNP8zdNK Bettor Math Elwyn Berlekamp Fortune's Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street. William Poundstone. x + 367 pp. Hill and Wang, 2005. $27. Every investor must decide how to partition her portfolio among many possible investments. Plausible strategies range from "diversify" to "focus." In a paper published in 1956, John L. Kelly of Bell Labs formulated the asset-allocation problem in terms of an idealized model for which he derived some quantitative results. He used colorful racetrack terminology reminiscent of the classic Damon Runyon movie Guys and Dolls: Suppose that one goes to the racetrack with an available bankroll, B. Suppose further that one knows for each horse the correct probability that it will win the next race. Suppose further that the betting odds are at least slightly inconsistent with this information. And finally, suppose that each race is merely one of a very long sequence of betting opportunities. Kelly found criteria for deciding how much one should then bet on each horse in each race. Kelly observed that, under similar idealized assumptions, the same formulation could also be applied to investments. In the idealized model, the portfolio manager has an accurate probability distribution on the future performance of each asset in the universe of potential investments. Kelly's methodology then provides a quantitative specification of how big a position to take in each of the candidate assets. Not surprisingly, the fraction of one's portfolio to be invested in any asset that has a negative expected rate of return will be zero. Most assets with positive expected rates of return will merit the investment of some positive fraction of the portfolio. Among assets with similar expected rates of return, those whose returns are relatively stable will be weighted more heavily than those whose future returns have significant risks of substantial losses, even when these risky investments also have some chance of large gains. All of these qualitative features of Kelly's performance criteria concur with conventional wisdom. What distinguishes Kelly's work from that of his predecessors is his quantitative specificity and the fact that he succeeded in proving that, under his assumptions, in the very long run the bankroll of an investor who followed his criteria would eventually surpass the bankroll of anyone following any other strategy. Kelly also derived a formula for the rate at which this bankroll would grow. This formula is related to a fundamental information-theoretic notion that Claude Shannon (now widely considered to be the father of the information age) had introduced in 1948. Shannon had shown that noise on a communication channel need not impose any bound on the reliability with which information can be communicated across it, because the probability of transmitting a very long file inaccurately can be made arbitrarily small by using sufficiently sophisticated coding techniques, subject to a constraint that the ratio of the length of the source file to the length of the encoded file must be less than a number called the channel capacity. Kelly showed that the asymptotically optimum asset allocation could be determined by solving a system of equations that maximized the log of one's capital. In his horse-track jargon, Kelly also showed that the resulting optimal compound growth rate could be viewed as the capacity of a hypothetical noisy channel over which the bettor was getting the information that distinguished his odds from those of the track. Kelly's betting system, expressed mathematically, is known as the Kelly criterion. The title of Kelly's paper, "A New Interpretation of the Information Rate," highlighted his discovery of a situation in which Shannon's celebrated capacity theorem applied even though no coding was contemplated. The paper, which appeared in the Bell System Technical Journal, initially attracted a modest audience among information theorists but went unnoticed by economists and professors of finance courses in business schools. Perhaps it would have received more attention if it had had another title. "Information Theory and Gambling" was the title that Kelly himself used for an earlier draft of his paper, but that title was rejected by AT&T executives. click for full image and caption The phrase "Fortune's Formula," which could have served as the title of Kelly's paper, was coined by the mathematician Ed Thorp as the title for a paper he wrote in 1961 about a strategy for winning at blackjack. It is now also the title of William Poundstone's new book, which tells stories of gamblers and investors over the past 150 years and how some of them have been influenced by the Kelly criterion. The style is somewhat like that of the business pages of a good newspaper, with no formulas or equations but occasional graphs. There are many sources, most of which are reliable. Even though there are many footnotes, the tone sometimes changes from that of a science journalist to that of a gossip columnist. There are biographical sketches not only of Kelly (who died in 1965 of a heart attack at age 41) and such relevant intellectual titans as Claude Shannon and Paul Samuelson (the father of modern economics), but also of many other characters. The career of the legendary Thorp, who became a successful, innovative financial entrepreneur, is treated at considerable length. Ed Thorp analyzed the game of blackjack far more deeply than anyone had ever done before, and he devised card-counting schemes to gain an edge, especially toward the end of a deck that is not reshuffled after every deal. He wrote a bestseller, Beat the Dealer, on how to win at blackjack. Earlier in his career, when he was a mathematics instructor at MIT, he met Claude Shannon, and he brought Claude and Betty Shannon with him as partners on one of his early weekend forays to Las Vegas. Later, he discovered and exploited a number of pricing anomalies in the securities markets and made a significant fortune. Thorp's first hedge fund, Princeton-Newport, achieved an annualized net return of 15.1 percent over 19 years, and in May 1998, Thorp reported that his own investments had an annualized 20 percent return over 28.5 years. Poundstone pursues a sequence of increasingly tenuous connections among moneymaking schemes and scams, some blatantly illegal and some with reputed mob connections, ranging all the way back in time to wire services that predated Alexander Graham Bell, and into the current political world of Rudy Giuliani. The reader can only wonder how much is fact, how much is literary license and how much is sensationalism. Marketing copy included on the book's dust jacket, characterizing Kelly as "gun-toting" and Shannon as "neurotic," falls squarely into the category of sensationalism. In later sections of the book, the patient reader will find some interesting graphs and an overview of a now long-standing academic and philosophical debate about the relevance and appropriateness of the Kelly criterion. Most people with academic training in physics, mathematics, operations research, computer science or engineering view the Kelly criterion as a useful quantitative guideline for investing, to be used along with others. They also view most large institutional money managers and economists as too risk-averse; the latter folks view the former as too risk-prone. Some extremely risk-averse business-school professors espouse a doctrine called the efficient-market hypothesis. Whenever some money manager achieves significantly above-average returns, adherents of that hypothesis strive to explain away the accomplishment: Perhaps the manager is a lucky survivor of an unrepeatable strategy that took very big risks on a few very large bets; perhaps he or she depended heavily on inside knowledge or engaged in illegal activity. No one who has made a legitimate fortune in the markets believes the efficient-market hypothesis. And conversely, no one who believes the efficient-market hypothesis has ever made a large fortune investing in the financial markets, unless she began with a moderately large fortune. Of the stories presented in Fortune's Formula, the case of Ed Thorp presents the greatest challenge to the efficient-market hypothesis. Poundstone devotes only a single paragraph to the even stronger cases of Ken Griffin, D. E. Shaw and Jim Simons, presumably because financial wizards as successful as these have always been unwilling to discuss their formulas in public. General readers seeking a broad overview of certain aspects of the field of financial mathematics and its practitioners will find the latter portions of Poundstone's book the most informative. Readers who enjoy a gossipy approach to business history will find the earlier portions more to their liking. Any experienced, quantitatively oriented investor will, without reading Poundstone's book, already know that she needs to estimate the likely distributions of returns of the various investments she is considering. This is quite difficult, because for some promising investments, historical data are very limited, and for others, there are good reasons to question whether the historical patterns are likely to persist into the future. So in practice, the allocation problem that Kelly's formula addresses is only one of the two main parts of the investor's puzzle. Poundstone recognizes this implicitly, but some readers would benefit from a more explicit statement of the dichotomy. In my experience, abstract financial mathematics is the only truly significant commonality between the world of finance and the world of racetracks and casinos. Poundstone has been lured by Kelly's colorful terminology into seriously overemphasizing the relevance and importance of whatever other relationships might exist. Portrayal of the seamy side of business is a genre that runs at least as far back as the novels of Charles Dickens. Readers who are looking for something in that vein as well as a light introduction to financial mathematics will find things to relish in Poundstone's book. Reviewer Information Elwyn Berlekamp, a professor of mathematics at the University of California at Berkeley, is best known for his works on games and codes. In 1960 and 1962, he was John Kelly's research assistant. In 1967, he coauthored Claude Shannon's last paper on information theory. In 1990, he managed a 55 percent gain of Jim Simons's Medallion Fund.
http://www.nytimes.com/2005/09/25/b...rss&adxnnlx=1141747748-d6H/rV1RZ6TE+WOWyjjC8w 'Fortune's Formula': Wanna Bet? By DAVID POGUE Published: September 25, 2005 Don't trust the title of "Fortune's Formula" - or its subtitle, either. If you expect the book to be about only one formula, untold story or scientific betting system, you'll become hopelessly confused. Those words should all be plurals. With a poet's gift for analogy and a nerd's fervor for math, the science journalist William Poundstone (the author of "How Would You Move Mount Fuji?") tells the stories behind not just one betting system, but practically every system ever devised, from a 1738 hypothesis called the St. Petersburg wager to today's Wall Street computer simulations. Fortunately for the casual reader, Poundstone balances the heavy helpings of statistical scrutiny with the fascination of cultural voyeurism, taking readers inside the unfamiliar worlds of gambling and investing. He leavens "Fortune's Formula" with tales of the quirky, greedy and often criminal characters who dreamed up these formulas - and exploited them all the way to the bank or to prison. The information-science genius Claude Shannon, for example, is depicted as a unicycling, juggling eccentric whose "toy room" includes "a flamethrowing trumpet and a rocket-powered Frisbee." Another mathematician believes that he could gain an edge in poker "by staring at light bulbs during games. The light contracted his pupils, making his reactions harder to read." And in one of the book's most hilarious anecdotes, the brilliant and sarcastic economist Paul Samuelson publishes a paper intended not only to refute a popular economic theory, but also to insult the intelligence of its fans by writing entirely in one-syllable words. ("What they do not see is this: When you lose - and you sure can lose - with N large, you can lose real big.") The least vividly drawn character, alas, is Poundstone's hero, Edward O. Thorp. He's a math professor who became intrigued by gambling - first the Las Vegas kind and then the stock market kind. The absence of any discernible personality is too bad, considering that he's the character with the most screen time, popping up now and then to comment on the mathematical discussions like a sort of geek chorus. (Poundstone thanks Thorp in his acknowledgments for reviewing the manuscript and supplying research material, and Thorp's glowing endorsement blurb appears in the book's press release. Did Poundstone feel obligated to avoid negative or colorful remarks?) In the early 1960's, Thorp believed he could find statistical methods of winning at blackjack and roulette. He teamed up, improbably, with a bookie and gangster named Manny Kimmel to test his theories at the real-world blackjack tables in Reno. Over all, Thorp's sophisticated card-counting methods worked very well indeed. "According to plan, Thorp did the counting and signaled to Kimmel. It took 30 minutes to clean out the table's money tray. . . . 'Oh, help me, please help me,' the dealer pleaded." Later in life, Thorp's methods made him (and his investors) fantastically wealthy at the wildly successful Princeton-Newport hedge fund. Poundstone generally seems to agree with his experts that you'd find more profitable stocks by throwing darts at the stock market pages than by asking an investment adviser. Yet Thorp's fund somehow managed to beat the odds, year in, year out, averaging 20 percent annual return over nearly 30 years. "The inexplicable aspect of Thorp's achievement," Poundstone writes, "was his continuing ability to discover new market inefficiencies, year after year, as old ones played out. This is a talent, like discovering new theorems or jazz improvisations." Given this astronomical success, readers will be understandably eager to find out what, exactly, Thorp's method was. As it turns out, it was based on the work of John Kelly, a Bell Labs researcher in the 1950's, but be warned - it's not simple. Kelly's formula incorporates such variables as the size of your bankroll and how much of an edge you have (a tip on a horse race, for example). It maximizes your return over repeated bets, while guaranteeing that you won't go bankrupt. "Each wager is scaled to the current size of the bankroll. Since you bet only a prescribed fraction of what you've currently got, you can never run out of money." Poundstone frequently shifts gears from the novelistic to the professorial. The most difficult sections of "Fortune's Formula" - or the best parts, depending on how into math you are - abandon the colorful characters and delve, for pages at a time, into their mathematical moneymaking methods. Here, for instance, is his discussion of one investing formula: "The 'trick' behind this is simple. The arithmetic mean return is always higher than the geometric mean. Therefore, a volatile stock with zero geometric mean return (as assumed here) must have a positive arithmetic mean return." To his credit, the author is often aware when he may be leaving non-math majors in the dust and makes heroic efforts to explain in layman's terms. At one point, he writes: "I have a hunch many readers' eyes are glazing over. Try this: The 'false corollary' is in the spirit of the bumper sticker WHOEVER DIES WITH THE MOST TOYS WINS." At another point, he cleverly explains data compression by comparing it to orange juice, which is shipped as a concentrate to save on freight and storage. The book is peppered with graphs and diagrams, some utterly opaque and some ingenious (coin-toss outcomes represented as a pinball machine). When these tactics succeed, they provide readers with satisfying bursts of sudden understanding. At other times, though, there's not enough sugar to help the medicine go down. Poundstone is also prone to long sequences of declarative noun-verb sentences that give the prose a numbing, repetitive rhythm: "Thorp received thousands of letters. Thorp discussed the situation with Shannon. Thorp wanted to accept one of the offers." There's also a long, novelistic section near the end of the book that recounts, blow by blow, Rudolph Giuliani's prosecution of fishy financial operators like Michael Milken and Ivan Boesky. It makes enjoyable reading, but what's it doing in this book? Still, although the narrative jumps from decade to decade and character to character, the disjointed structure pays off in some surprising ways. In later chapters, characters and events that Poundstone seemed to have dropped re-enter the story and affect modern-day players. For example, remember Manny Kimmel, the shady bookie who accompanied Thorp to Reno? His firstborn son, Caesar Kimmel, shows up later, accompanied by his business partner, Steve Ross. Ross, having read Ed Thorp's book on winning at blackjack, winds up parlaying the Kimmels' chain of Manhattan parking lots into bigger and bigger things, until they finally become, incredibly, Time Warner. The way these threads resurface to create a larger tapestry makes it much easier to enjoy the book's lengthy digressions. "Fortune's Formula" may be the world's first history book, gambling primer, mathematics text, economics manual, personal finance guide and joke book in a single volume. Poundstone comes across like the best college professor you ever had, someone who can turn almost any technical topic into an entertaining and zesty lecture. But every now and then, you can't help wishing there were some teaching assistants on hand to help.
这本书其实不错的啊,起码让我这种不会英语的人知道资金管理的问题.不至于一看到别人写的书就当科学来学.只是少了些数理公式.要不是这本书我还以为那个通往财务自由之路的家伙讲的东东有多高明.整个一保险推销员的嘴脸