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Edward O. Thorp

Edward O. Thorp

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Edward Oakley Thorp is an American
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 mathematics professor, author, hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...

 manager, and blackjack
Blackjack
Blackjack, also known as Twenty-one or Vingt-et-un , is the most widely played casino banking game in the world...

 player. He was a pioneer in modern applications of probability theory
Probability theory
Probability theory is the branch of mathematics concerned with analysis of random phenomena. The central objects of probability theory are random variables, stochastic processes, and events: mathematical abstractions of non-deterministic events or measured quantities that may either be single...

, including the harnessing of very small correlation
Correlation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....

s for reliable financial gain.

He was the author of Beat the Dealer, the first book to mathematically prove, in 1962, that the house advantage in blackjack could be overcome by card counting
Card counting
Card counting is a casino card game strategy used primarily in the blackjack family of casino games to determine whether the next hand is likely to give a probable advantage to the player or to the dealer. Card counters, also known as advantage players, attempt to decrease the inherent casino house...

. He also developed and applied effective hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...

 techniques in the financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...

s, and collaborated with Claude Shannon in creating the first wearable computer
Wearable computer
Wearable computers are miniature electronic devices that are worn by the bearer under, with or on top of clothing. This class of wearable technology has been developed for general or special purpose information technologies and media development...

.

Thorp received his Ph.D. from the University of California, Los Angeles
University of California, Los Angeles
The University of California, Los Angeles is a public research university located in the Westwood neighborhood of Los Angeles, California, USA. It was founded in 1919 as the "Southern Branch" of the University of California and is the second oldest of the ten campuses...

 in 1958, and worked at M.I.T. from 1959 to 1961. He was a professor of mathematics from 1961-1965 at New Mexico State University
New Mexico State University
New Mexico State University at Las Cruces , is a major land-grant university in Las Cruces, New Mexico, United States...

, and then joined the University of California, Irvine
University of California, Irvine
The University of California, Irvine , founded in 1965, is one of the ten campuses of the University of California, located in Irvine, California, USA...

 where he was a professor
Professor
A professor is a scholarly teacher; the precise meaning of the term varies by country. Literally, professor derives from Latin as a "person who professes" being usually an expert in arts or sciences; a teacher of high rank...

 of mathematics from 1965 to 1977 and a professor of mathematics and finance from 1977 to 1982.

Computer aided research in blackjack


Ed Thorp used the IBM 704
IBM 704
The IBM 704, the first mass-produced computer with floating point arithmetic hardware, was introduced by IBM in 1954. The 704 was significantly improved over the IBM 701 in terms of architecture as well as implementations which were not compatible with its predecessor.Changes from the 701 included...

 as a research tool in order to investigate the probabilities of winning while developing his blackjack
Blackjack
Blackjack, also known as Twenty-one or Vingt-et-un , is the most widely played casino banking game in the world...

 game theory, which was based on the Kelly criterion
Kelly criterion
In probability theory, the Kelly criterion, or Kelly strategy or Kelly formula, or Kelly bet, is a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any...

, which he learned about from the 1956 paper by Kelly. He learned Fortran
Fortran
Fortran is a general-purpose, procedural, imperative programming language that is especially suited to numeric computation and scientific computing...

 in order to program the equations needed for his theoretical research model on the probabilities of winning at blackjack. Thorp analyzed the game of blackjack to a great extent this way, while devising card-counting schemes with the aid of IBM 704 in order to improve his odds, especially near the end of a card deck that is not being reshuffled after every deal.

Applied research in Reno, Lake Tahoe and Las Vegas


Thorp subsequently decided to test his theory in practice in Reno
Reno
Reno is the fourth most populous city in Nevada, US.Reno may also refer to:-Places:Italy*The Reno River, in Northern ItalyCanada*Reno No...

, Lake Tahoe
Lake Tahoe
Lake Tahoe is a large freshwater lake in the Sierra Nevada of the United States. At a surface elevation of , it is located along the border between California and Nevada, west of Carson City. Lake Tahoe is the largest alpine lake in North America. Its depth is , making it the USA's second-deepest...

, and Las Vegas
Las Vegas, Nevada
Las Vegas is the most populous city in the U.S. state of Nevada and is also the county seat of Clark County, Nevada. Las Vegas is an internationally renowned major resort city for gambling, shopping, and fine dining. The city bills itself as The Entertainment Capital of the World, and is famous...

.

Thorp started his applied research using $10,000, with Manny Kimmel
Manny Kimmel
Manny Kimmel, born Emmanuel Kimmel, was a notable underworld figure between the 1930s and 1960s. Founder of the Kinney Parking Company, a chain of parking lots and garages. According to Connie Bruck, he cooperated with the major racketeer and bootlegger in Newark, Abner Zwillman, leasing his...

, a wealthy professional gambler and one-time illegal bookie with mob connections, providing the venture capital. First they visited Reno and Lake Tahoe establishments where they tested Thorp's theory at the local blackjack tables. The experimental results proved successful and his theory was verified since he won $11,000 in a single weekend. He could have won more during his initial foray in Las Vegas had his uncanny ability at winning not drawn the unwelcome attention of the casino security
Casino security
Casino security refers to the measures that are taken at casinos to protect the establishment's money and property and the patrons. The security protects the casino and its customers from violent crime, theft, and other inappropriate behavior....

, which led to repeated expulsions from the various premises that he visited that night. Casinos now shuffle well before the end of the deck as a countermeasure to his methods. During his Las Vegas casino visits Thorp frequently used disguises such as wraparound glasses and false beards. In addition to the blackjack activities, Thorp had assembled a baccarat
Baccarat
Baccarat is a card game, played at casinos and by gamblers. It is believed to have been introduced into France from Italy during the reign of King Charles VIII , and it is similar to Faro and Basset...

 team which was also winning.

News quickly spread throughout the gambling community, which was eager for new methods of winning, while Thorp became an instant celebrity among blackjack aficionados. Due to the great demand generated about disseminating his research results to a wider gambling audience, he wrote the book Beat the Dealer in 1962, widely considered the original card counting manual
User guide
A user guide or user's guide, also commonly known as a manual, is a technical communication document intended to give assistance to people using a particular system...

,
which sold over 700,000 copies, a huge number for a specialty title which earned it a place in the New York Times bestseller list, much to the chagrin of Kimmel whose identity was thinly disguised in the book as Mr. X.

Thorp's blackjack research is one of the very few examples where results from such reached the public directly, completely bypassing the usual academic peer review
Peer review
Peer review is a process of self-regulation by a profession or a process of evaluation involving qualified individuals within the relevant field. Peer review methods are employed to maintain standards, improve performance and provide credibility...

 process cycle. Moreover, Thorp became one of the very few applied mathematicians
Applied mathematics
Applied mathematics is a branch of mathematics that concerns itself with mathematical methods that are typically used in science, engineering, business, and industry. Thus, "applied mathematics" is a mathematical science with specialized knowledge...

 who risked physical harm in verifying a computer simulation. He has also stated that he considered the whole experiment an academic exercise. This also marked the first time in the history of computing that a computer was used as a gambling aid.

In addition, Thorp, while a professor of mathematics at MIT, met Claude Shannon, and took him and his wife Betty Shannon as partners on weekend forays to Las Vegas
Las Vegas Strip
The Las Vegas Strip is an approximately stretch of Las Vegas Boulevard in Clark County, Nevada; adjacent to, but outside the city limits of Las Vegas proper. The Strip lies within the unincorporated townships of Paradise and Winchester...

 to play roulette
Roulette
Roulette is a casino game named after a French diminutive for little wheel. In the game, players may choose to place bets on either a single number or a range of numbers, the colors red or black, or whether the number is odd or even....

 and blackjack, at which Thorp was very successful.
His team's roulette play was the first instance of using a wearable computer in a casino — something which is now illegal. The wearable computer was co-developed with Claude Shannon between 1960-61. The
final operating version of the device was tested in Shannon’s home lab at his basement in June 1961. His achievements have led him to become an inaugural member of the Blackjack Hall of Fame
Blackjack Hall of Fame
The Blackjack Hall of Fame honors the greatest blackjack experts, authors, and professional players in history. It was launched in 2002, and its physical premises are in San Diego, California.-History:...

.

He also devised the "Thorp count," a method for calculating the likelihood of winning in certain endgame positions in backgammon
Backgammon
Backgammon is one of the oldest board games for two players. The playing pieces are moved according to the roll of dice, and players win by removing all of their pieces from the board. There are many variants of backgammon, most of which share common traits...

.

Stock market


Since the late 1960s, Thorp has used his knowledge of probability and statistics
Probability and statistics
See the separate articles on probability or the article on statistics. Statistical analysis often uses probability distributions, and the two topics are often studied together. However, probability theory contains much that is of mostly mathematical interest and not directly relevant to statistics...

 in the stock market by discovering and exploiting a number of pricing anomalies
Market anomaly
A market anomaly is a price and/or return distortion on a financial market that seems to contradict the efficient market hypothesis.The market anomaly usually relates to:...

 in the securities market
Securities market
Securities market is an economic institute within which take place sale and purchase transactions of securities between subjects of economy on the base of demand and supply....

s, and he has made a significant fortune. Thorp's first hedge fund was Princeton/Newport Partners
Princeton Newport Partners
Princeton/Newport Partners was an early alternative investment management company founded by pioneering mathematical financier Edward O. Thorp in late 1974. The company was developed by assuming the instruments of an earlier venture, Convertible Hedge Associates...

. He is currently the President of Edward O. Thorp & Associates, based in Newport Beach, CA. In May 1998, Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years.

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