ED THORP

T
Ed Thorp cracked blackjack, used the first wearable he year is 1938. The place, about 45
miles out of Chicago. On the steps of a
computer to beat roulette, started the world’s first market a boy of not quite six faces off
against a perplexed looking local man
quantitative hedge fund, anticipated the Black- who holds a heavy tome belonging to
the kid, and studies it with some skepti-
Scholes formulae by five years, and has maintained cism. “Egbert 802 to 839,” the boy
begins, quietly, and in a considered
consistently excellent returns through nearly forty tone somewhat beyond his years he con-
tinues, “Ethelwulf 839 to 857, Ethelbald
years in hedged portfolios and derivatives. 857 to 860, Ethelbert 860 to 866,
Ethelred I 866 to 871, Alfred the Great
Dan Tudball reviews the life of one of quantitative 871 to 901, Edward I 901 to 924,

finance’s great heroes, and speaks to the Ethelstan 924 to 940, Edmund I 940 to
946, Edred 946 to 955, Edwig 955 to 959,

man himself Edgar I 959 to 972, Edward II 975 to 978,

Ethelred II 978 to 1016, Sven 1013 to

In for the

24 Wilmott magazine
Wilmott magazine 25
ED THORP

1014, Canute the Great 1016 to 1035, shopping expedition the young Thorp’s physics, electronics, astronomy and but I remember seeing pictures of
Harold 1036 to 1039, Harthacnute 1039 parents and friends were sat down try- mathematics. Being most interested in homeless people in the newspapers, tat-
to 1042, Edward III 1042 to 1066, ing to induce the child to speak - still a chemistry he sat for the All-Southern- tered clothes and that sort of thing. It’s
Harold...” The man’s face sets in disbe- popular pastime in the Thorp house- California high school chemistry test, something that people of that era
lief as the boy continues his litany; the hold. Some people stepped out of the despite being a few years younger than remember very vividly. Saving every-
book he refers to is A Child’s History Of elevator and someone asked, “Where’s other students sitting for the exam. He thing, And that had an impact on me, I
England by Charles Dickens - every the man gone?” Thorp recounts the came fourth in that part of the state, was very frugal for the first twenty-five
entry in the chronology of monarchs moment down the line from Newport and was very proud of that result but he years of my life and this allowed me to
recited from this boy’s memory to per- Beach “Oh, he’s gone to buy a shirt,” so recalls that the reason why he had only make it through university on very lim-
fection. The boy’s father is equally everybody’s eyes popped out and the achieved that position rather than com- ited means.” With money in short sup-
taken aback. Thorp Sr had long known next question was “‘Where has the ing first was down to a new section ply, and with a burgeoning interest in
his son was a prodigy, but this display is woman gone?’ and I answered ‘Oh, requiring slide rules. Ed only had a 10- expensive experimentation, Ed would
shocking. Only moments before the She’s gone to the bathroom to do pee- cent slide rule, which was “a piece of deliver newspapers at three in the
morning in order to fund his science.

A child with a preternatural gift for reflection, and When speaking to Thorp about
these formative years a vivid picture is

independence of thought – only prepared to painted of a child whose critical and

analytical faculties were highly devel-
oped. A child with a preternatural gift
commit to something, whether an idea or a course for reflection, and independence of
thought – only prepared to commit to
of action, after the very deepest consideration. something, whether an idea or a course
of action, after the very deepest consid-
eration. Ed was fascinated with Morse
man had questioned how such a young pee’ and their faces turned reddish and junk” in his hands. He decided to avenge code, and was a radio ham - this in itself
child could read such a weighty vol- they started to ply me with questions.” himself the following year by taking the deriving from a passion for structure
ume. He’d followed that with a chal- This revelation motivated Thorp’s analogous physics test and came out and organization. Certain gifts, like a
lenge to name all the kings and queens father to see how much he could teach first, by a very large margin. It was this near photographic memory, died away
of England in order and with the dates his young son. Reading primers led result that got him a scholarship to UC as life required the skill less, but even to
of their reigns. And here was the child, swiftly to more complex books and Ed Berkeley - without it Thorp may not this day Ed has a facility for two and
nearing the end of his recitation, sud- was reading confidently by the age of have been able to advance further in three dimensional geometry – which
denly looking puzzled himself “Queen three and a half, successively more com- education, money was so tight. allows him to mentally map any jour-
Victoria, I know when her reign began, plex books led to the showdown at the ney he makes and very quickly draw an
but I don’t know when it ended.” But market. Between the ages of five and ten Austerity and Reason accurate map from memory. Other les-
then again, neither did Dickens. Ed devoured every scrap of reading Ed had grown up in the Depression era, sons learnt in childhood still resonate
Edward Oakley Thorp was born on material he could get his hands on. and that defining time had affected with Ed today, his commitment to
August 14th 1932 in Chicago, Illinois. Worried that he was becoming too cere- him just as deeply as his contempo- Reason and its values. “I think as far as
His parents had met in Manila, when bral at the expense of other activities, raries. Even at six years old, Ed had the way I approach things professional-
Thorp Sr was stationed with the Ed’s parents were concerned he wasn’t begun formulating ways to assist with ly and otherwise I’m unusually rational
Philippine constabulary. That the child getting out enough – they started him the household income “It was a time as people go and I don’t feel like I have
Thorp was different was already evi- on building model airplanes, and then when everybody was very poor, and I any of the usual areas of irrationality
dent to his parents when, even at the bought him a mineral set when he was remember getting 5 - cent packs of Kool that people have. I don’t want to offend
age of two and a half he had not yet ten. This was followed by a chemistry Aid, making six glasses out of each pack but I’ll mention things like astrology
uttered a single word. This difference set, which really set Ed off. He cordoned and selling them at a penny a glass to and tales from olden times about things
was soon recognized as prodigy when off a section of the garage for his ‘exper- WPA workers out on the streets who got that allegedly happened. The place I
the mute child, by then nearly three, iments’ which allowed an outlet for his hot and sweaty in the summer. I remem- may go wrong from time to time is that
was taken on a shopping trip to fascination with controlled explosions. ber I saved every cent. Fortunately my I may not have enough experience of
Montgomery Ward, a department store These explosions, lead to an explosion father was in a moderately secure job some aspects of the world, for instance
in Chicago. During a break from the of another kind; from chemistry it was and we always had food on the table, as I grew up I was very naive about peo-

26 Wilmott magazine
ple. Until I was nine I believed that
everything I saw in print was true I
found it impossible to believe other-
wise. Until, that is, I saw two newspa-
pers with conflicting information and
that particular naivety disappeared
rather rapidly after that.”

The deck re-stacked

Back in 1914 Ambrose Bierce wrote,
“The gambling known as business looks
with austere disfavor upon the business
known as gambling.” However during
Ed’s formative years through to the late
1960s the notion that the world of
finance could derive valuable lessons
from the world of casinos had not
become the cliché that it is today. As far
as gambling was concerned, Thorp’s
first brush with that world was under
the tutelage of an older cousin who
would take his young relative to gas sta-
tions that housed illegal slot machines
in their washrooms. There, Ed was
shown how to jiggle the handles on the
machines to pay off when they should-
n’t. Naturally, money being scarce at
the time, this was a delight – however it
was not until he was at university that
Thorp got to seriously thinking about
gambling in relation to his innate tal-
ents for mathematics and physics. And
the challenge that interested him then
was less getting the payoff when there
shouldn’t be one, but rather when
there should.
Between 1955 and 1964 Ed was to
work on two things that were to have a
profound effect, not only on people in
Nevada and Atlantic City who sported
names like ‘The Fish’ or ‘Ax Handle’
between their fore and surnames, but
also on every person with the slightest
interest in reducing risk. The first was
the development of the wearable com-
puter for predicting the outcome on a
roulette table (See Sidebar) success
there primed him for his approach to
blackjack.

Wilmott magazine 27
ED THORP

By 1958, when Ed first started think-

ing about blackjack, he had married THE WORLD’S FIRST WEARABLE COMPUTER

I
Vivian and had achieved his Ph.D at n spring 1955 Ed Thorp was in his second year of graduate experiments, to try to predict the moment when the spinning
UCLA, work on roulette had resulted physics at UCLA. At tea time one Sunday he got to chatting ball would fall into the waiting pockets. From their model they
from some idle banter with friends on with colleagues about how to make ‘easy money’. The conver- were able to predict any single number with a standard devia-
how to make easy money, back in 1955. sation turned to gambling, and roulette in particular. Was it possi- tion of 10 pockets. This converts to a 44 per cent edge on a bet
This time round it was a trip to Las Vegas ble to predict, at least with some exploitable degree of accuracy, on a single number. Betting on a specific octant gave them a
for a cheap, non-gambling, vacation the outcome of a spin of the wheel? Some of his colleagues, the 43 per cent advantage.
that got Ed thinking. At the time the pre- ones in the know, were certain that the roulette wheels were man- It is one thing to win on paper, or in the comfort of a base-
vailing assumption was that none of the ufactured so precisely that there were no imperfections that could ment. It is quite another to win inside a noisy casino.
major gambling games allowed for sys- be discerned, never mind exploited. But Ed’s counter to that was From November 1960 until June 1961 Ed and Shannon
tems. The accepted thought was that simple, if the wheels are so perfect you should be able to predict, designed and built the world’s first wearable computer. The
because most games depended upon using simple Newtonian principles, the path of the ball and its twelve transistors, cigarette-pack sized computer was fed data
independent trials processes – i.e every final resting place. by switches operated by their big toes. One switch initialized
spin or dice roll was unaffected by those Ed got to work in the late 1950s, playing around with a the computer and the other was for timing the rotation of the
that preceded it – then there was no way cheap miniature roulette wheel, filming and timing the revolu- ball and rotor. The computer predictions were heard by the
a mathematical system would allow you tions. He met up with Claude Shannon, the father of informa- computer wearer as one of eight tones via an earpiece. (Ed and
to numerically track outcomes and rea- tion theory in 1959, originally to discuss his blackjack results, Shannon decided that the best bet was on octants rather than
sonably predict future outcomes. Unless but the conversation soon turned to other games and roulette single numbers since the father of information theory knew
you used rigged dice or had some infor- in particular. Shannon was fascinated. Shortly afterwards they that faced with n options individuals take a time a+b ln(n) to
mation on the croupier, you may as well met up at Shannon’s house, the basement of which was make a decision.)
bring along a rabbit’s foot as a calcula- packed with mechanical and engineering gadgets, the perfect This computer was tested out in Las Vegas in the summer
tor. Ed had previously concluded (in playground for further roulette experiments. of 1961. But for problems with broken wires and earpieces
1955) that roulette was an exception to Ed and Shannon together took the roulette analysis to falling out, the trip was a success. Similar systems were later
this rule, because he wasn’t using a greater heights, investing $1,500 in a full-size professional built for the Wheel of Fortune which had an even greater edge,
numerical system and instead relied on wheel. They calibrated a simple mathematical model to the an outstanding 200 per cent.
the physical properties of the mecha-
nism. ‘Fortune’s Formula’ at the American
Prior to his trip to Vegas Thorp had
been given a paper, published in the
The important observation he Mathematical Association. After the
trip to Nevada Ed had tested some of his
Journal of the American Statistical
Association written by US Army mathe-
took with him was that he had own theories on MIT’s own IBM 704
mainframe computer (a far cry from 10-
maticians (Roger R. Baldwin, Wilbur E.
Cantey, Herbert Maisel, and James P.
been losing at a far slower rate cent slide rules!) and duplicated in a few
hours what would have taken over
McDermott) on basic strategy in the
game of blackjack. The contention of the than others on the table 10,000 man years of labor on a hand
held calculator. It was these findings
paper was that the house edge on black- that he presented in Washington. At the
jack could fall as low as 0.0062 (some- end of the presentation all of Ed’s
what later corrected by them to .0032), losing at a far slower rate than others on Independent trials processes were not a mimeographed copies of his report
Ed made himself a little reference card the table and the realization that he factor in this game and thus, Ed rea- were snapped up as the 300 or more
to take to the table, purchased ten could modify the methodology. soned, all you needed was a decent fre- mathematicians in the room rushed
bucks’ worth of chips and prepared to Like roulette, Blackjack was in fact quency of favorable situations and the podium. When Thorp had arrived
test the methodology. Once at the table also an exception to the rule that gam- adjustments in the betting spread in in Washington he was already aware
he played the game for about twenty bling games couldn’t be beaten by fair order to get the edge. Ed, whether he that the media had whipped up a small
minutes – never having played it before, means. At that time, when a card was realized it or not was on the edge of storm in advance. An AP reporter had
and this being the first time he’d set foot dealt it was put aside, thus shifting the something himself. been leafing through the Association’s
in a Casino – eventually losing the ten composition of the now depleted deck In the fall of 1961 Ed was CLE Moore abstracts prior to the meeting and
dollars, but the important observation in a set manner, a manner that would instructor at MIT and went to called Ed, this resulted in a story in the
he took with him was that he had been either favor the player or the casino. Washington to present a paper entitled Boston Globe the next day. Ed recalls that

28 Wilmott magazine
 ED THORP

the phone was ringing off the hook for

the next four days, his wife Vivian filled
wintry afternoon in February 1961 we
looked out our window and saw a mid- At MIT all six faculty secretaries
an entire legal pad with messages night blue Cadillac pull up, but I didn’t
before finally refusing to pick up the
phone, their daughter - for weeks after -
see the man I’d spoken to on the phone –
I saw two young blondes in mink coats
were snowed under by tens of
would cry at the sound of a phone ring-
ing. The following weeks at MIT all six
and they got out – and tucked as snug as
could be between them in a long cash-
thousands of letters - until the
faculty secretaries were snowed under
by tens of thousands of letters - until the
mere coat was Kimmel. He introduced
the two blondes as his nieces; I took it on university had to tell Ed to deal
university had to tell Ed to deal with the
correspondence himself because the
face value but my wife disagreed! She
was much more aware of the ways of the with the correspondence himself
secretaries weren’t able to deal with world than I was, she was a literature
other faculty business. major and very widely read. She’s very wherein Thorp goes into some detail
perceptive about people, what makes about the trip to Reno that Kimmel and
Lady Luck RIP them tick and what their hidden agen- another flush gambler, Eddie Hand (Mr
Of course, it wasn’t just letters. Offers to das are.” Y), bankrolled in 1961. It wasn’t until
bankroll Thorp came apace, but Ed did- Whatever Kimmel’s background the early ’90s that Ed learned about
n’t take the bait. However, this situation was Ed was blissfully unaware of it at Kimmel’s credentials, during a conver-
was to change in early 1961. One of the the time. Kimmel was later to be sation with the author Connie Brook
people who had read about Ed’s presen- immortalized as Mr X in Beat the Dealer, who was working on Master of the Game,
tation was Emmanuel ‘Manny’ Kimmel,
a professional (and very successful) gam-
bler whose own background could not THE RULES OF BLACKJACK OR 21
be further from that of Thorp’s. The The aim of the game for the player is to hold a and then play them as two distinct
story goes that Kimmel was kidnapped card count greater than that of the dealer without hands. This is called ‘splitting pairs’.
as a child and put to sea – he managed to exceeding 21 (going ‘bust’). aces can receive only one additional
jump ship somewhere in the Far East Before any cards are dealt, the player must card. After splitting, ace+10 counts as
where he found work on a cattle boat – place his bet in front of his table position. The 21 and not as blackjack.
the work involved a shovel – and from dealer deals two cards to each of the players, and If the dealer’s up card is an ace, the
then on he raised himself. He was a well- two to himself (one of the dealer’s cards is dealt player may take insurance, a bet not
known face in the demi-monde and one face up and the other face down). Court cards exceeding one half of his original bet. If
of the best proposition men in the US, he (kings, queens and jacks) count as 10, ace counts as the dealer’s down card is a 10-count
had a good uneducated, intuitive under- either one or 11 and all other cards are counted at card, the player wins 2 to 1. Any other
standing of odds and “proposition bets”. their face value. The value of the ace is chosen by the card means a win for the dealer.
Not being a man of letters Kimmel had player. It is sometimes permitted to ‘surren-
Thorp checked out, phoned him, and If the player’s first two cards are an Ace and a 10-count card der’ your bet. When permitted, a player may give up his first
made his way to Thorp’s apartment in he has what is known as ‘blackjack’ or a natural. If he gets two cards and lose only one half of his original bet.
Cambridge, MA. Kimmel’s proposal blackjack with his first two cards the player wins, unless the The dealer must draw on 16 and stand on 17. In some casi-
coincided with Ed’s decision to try out dealer also has a blackjack, in which case it is a standoff or tie (a nos, the dealer is required to draw on soft 17 (a hand in which
his theories in practice, to show skeptics ‘push’) and no money changes hands. A winning blackjack pays an ace counts as 11, not one). Regardless of the total the player
that his theory really worked and in the player 3 to 2. has, the dealer must play this way.
preparation for a book he planned. “A lot ‘Hit’ means to draw another card. ‘Stand’ means no more In a tie no money is won or lost.
of people said it was pie in the sky; a half- cards are taken. If the player hits and busts, his wager is lost. Rules differ subtly from casino to casino, as do the number
baked theory and a few challenged me The player is also allowed to double the bet on his first two of decks used.
to actually do it. So having a childhood cards and draw one additional card only. This is called ‘doubling The advantage to the dealer is that the player can go bust,
experience of actually doing things in down’. losing his bet immediately, yet the dealer may later bust. This
science as well as thinking about theo- If the first two cards a player is dealt are a pair, he may split asymmetry is the key to the house’s edge. The key to the play-
ries I knew I had to do it.” Ed goes on to them into two separate hands, bet the same amount on each er’s edge is that he can vary both his bets and his strategy.
describe the day he met Kimmel, “ One

Wilmott magazine 29