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Edward O. Thorp

Edward O. Thorp

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Dr. Edward Oakley Thorp (born August 14, 1932, Chicago
Chicago
Chicago is the largest city in the U.S. state of Illinois, and with more than 2.8 million people, the 3rd largest city in the United States...

) 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 manager, and blackjack
Blackjack
Blackjack, also known as Twenty-one, Vingt-et-un , or Pontoon, is the most widely played casino banking game in the world. The basic rules of the game involve adding the value of an initial two card hand in hopes of being dealt a value of twenty-one...

 player. He is widely known as the author of the 1962 book Beat the Dealer, which was the first book to prove mathematically that blackjack could be beaten by card counting
Card counting
Card counting is a card game strategy used to determine when a player has a probability advantage. The term is used almost exclusively to refer to the tracking of the ratio of high cards to low cards in blackjack and its derivatives such as Spanish 21, although it is sometimes used to refer to...

. The technique eliminated the advantage of the house, which had an estimated maximum of approximately 5% (when following strategies with the smallest possibility of winning, either mimicking the dealer or never busting), and instead gave the player an advantage of approximately 1%. He is also regarded as the co-inventor of the first wearable computer
Wearable computer
Wearable computers are computers that are worn on the body. This type of wearable technology has been used in behavioral modeling, health monitoring systems, information technologies and media development...

 along with Claude Shannon
Claude Shannon
Claude Elwood Shannon , an American electronic engineer and mathematician, is known as "the father of information theory".Shannon is famous for having founded information theory with one landmark paper published in 1948...

.

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 research university located in the Westwood neighborhood of Los Angeles, California, in the United States. It was founded in 1919 and is the second-oldest general-purpose campus in the University of California system...

 in 1958, and worked at M.I.T. from 1959 to 1961. He was a professor
Professor
The meaning of the word professor varies. In some English-speaking countries, it refers to a senior academic who holds a departmental chair, especially as head of the department, or a personal chair awarded specifically to that individual...

 of mathematics from 1965 to 1977 and a professor of mathematics and finance from 1977 to 1982 at University of California, Irvine
University of California, Irvine
The University of California, Irvine is a public coeducational research university founded in 1965, located in Irvine, California....

.

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 April, 1954. The 704 was significantly improved over the IBM 701 in terms of architecture as well as implementation, and was not compatible with its predecessor.Changes from the 701...

 as a research tool in order to investigate the probabilities of winning while developing his blackjack
Blackjack
Blackjack, also known as Twenty-one, Vingt-et-un , or Pontoon, is the most widely played casino banking game in the world. The basic rules of the game involve adding the value of an initial two card hand in hopes of being dealt a value of twenty-one...

 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. Thorp subsequently decided to test his theory in practice in Reno
Reno
-Places:United States*Reno, Nevada*Reno, Indiana*Reno, Ohio*Reno, Pennsylvania*Reno, Lamar County, Texas*Reno, Parker County, Texas*Reno County, Kansas*Reno Township, Michigan*Reno Township, MinnesotaCanada*Reno No...

, Lake Tahoe
Lake Tahoe
Lake Tahoe is a large freshwater lake in the Sierra Nevada mountains of the United States. It is located along the border between California and Nevada, west of Carson City, Nevada. Lake Tahoe is the largest alpine lake in North America...

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

.

Applied research in Reno, Lake Tahoe and Las Vegas



Thorp started his applied research using $10,000, with Manny Kimmel
Manny Kimmel
Manny Kimmel Born Emanuel Kimmel. Was a notable underworld figure between 1930's and 1960's. 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 garages...

, 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, 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 casino card game. It is believed to have been introduced into France from Italy during the reign of Charles VIII of France , and it is similar to Faro and to Basset. There are three accepted variants of the game: baccarat chemin de fer, baccarat banque , and punto banco...

 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.

It is also worth noting that 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 the process of subjecting an author's scholarly work, research, or ideas to the scrutiny of others who are experts in the same field. Peer review requires a community of experts in a given field, who are qualified and able to perform impartial review...

 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 the mathematical techniques typically used in the application of mathematical knowledge to other domains.-Divisions of applied mathematics:...

 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
Claude Shannon
Claude Elwood Shannon , an American electronic engineer and mathematician, is known as "the father of information theory".Shannon is famous for having founded information theory with one landmark paper published in 1948...

, and brought 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 South in Clark County, Nevada. A small portion of the Strip lies in Las Vegas, but most of it is in the unincorporated areas of Paradise and Winchester...

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

 and blackjack
Blackjack
Blackjack, also known as Twenty-one, Vingt-et-un , or Pontoon, is the most widely played casino banking game in the world. The basic rules of the game involve adding the value of an initial two card hand in hopes of being dealt a value of twenty-one...

, 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:...

.

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 depends on the characteristics of particular probability distributions, and the two topics are normally studied together.See also*List of probability topics...

 in the stock market by discovering and exploiting a number of pricing anomalies in the securities markets, and he has made a significant fortune.. 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...

 was Thorp's first hedge fund, achieving an annualized net return of 15.1 percent over 19 years. 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.

External links