Edward O. Thorp is a legend in both the gaming and the quant worlds. The author of Beat the Dealer and Beat the Market, he went from math professor and blackjack whiz to renowned hedge fund manager. In A Man for All Markets (Random House, 2017), he reflects on his life and the power of thinking differently—and deeply.
Thorp learned how to puzzle things out for himself as a largely self-taught child. He also devised methods for learning how to learn. For instance, when at the age of 12 he set out to master Morse Code, required to get his ham radio operator license, he invested almost three weeks’ income from delivering newspapers in a “tape machine” to practice transcribing code. The machine’s speed was adjustable. Young Thorp’s plan “was to understand every tape at a slow rate, then speed the tapes up slightly and master them again.” He measured his progress against that of World War II army trainees. He writes: “I drew a graph of the hours I spent versus my speed and found that using my method I learned four times as fast per hour spent as did the army trainees.” That Thorp was uncommonly bright might also have contributed just a tad to this carefully recorded outcome.
Fast forward to Thorp’s time at the blackjack table. He recalls playing at one casino where the rules were excellent: “players could insure, split any pair, and double down on any set of cards. Even so, the cards ran badly, I lost steadily, and after four hours I was behind $1,700 and discouraged. Of course, I knew that just as the house can lose in the short run even though it has the advantage in a game, so a card counter can fall behind and this can last for hours or, sometimes, even days. Persisting, I waited for the deck to become favorable just one more time.” Soon enough the deck produced a 5 percent advantage, so Thorp made the maximum bet of $300, all his remaining chips. Dealt a pair of 8s, he pulled out his wallet to bet another $300 on the split hands. And, getting a favorable second card on one of the 8s, he dropped another $300 on the hand. The dealer busted, so Thorp gained $900. The deck continued to be favorable, “calling for big bets,” and the next deck was good as well. In a few minutes he was ahead $255 and quit for the evening.
As Thorp reflects, “for the second time, the Ten-Count System had shown moderately heavy losses mixed with ‘lucky’ streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and the investment worlds.”

(more…)