The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Read Online Free

later, each of the players in the room that night would find himself in the crosshairs of one of the most brutal market meltdowns ever seen, one they had helped to create. Indeed, in their search for Truth, in their quest for alpha, the quants had unwittingly primed the bomb and lit the fuse for the financial catastrophe that began to explode in spectacular fashion in August 2007.
    The result was possibly the biggest, fastest, and strangest financial collapse ever seen, and the starting point for the worst global economic crisis since the Great Depression.
    Amazingly, not one of the quants, despite their chart-topping IQs, their walls of degrees, their impressive Ph.D.’s, their billions of wealth earned by anticipating every bob and weave the market threw their way, their decades studying every statistical quirk of the market under the sun, saw the train wreck coming.
    How could they have missed it? What went wrong?
    A hint to the answer was captured centuries ago by a man whose name emblazoned the poker chips the quants wagered with that night: Isaac Newton. After losing £20,000 on a vast Ponzi scheme known as the South Sea Bubble in 1720, Newton observed: “I can calculate the motion of heavenly bodies but not the madness of people.”

Just past 5:00 A.M . on a spring Saturday in 1961, the sun was about to dawn on a small, ratty casino in Reno, Nevada. But inside there was perpetual darkness punctuated by the glow of neon lights. A blackjack player sat at an otherwise empty table, down $100 and exhausted. Ed Thorp was running on fumes but unwilling to quit.
    “Can you deal me two hands at once?” he asked the dealer, wanting to speed up play.
    “No can do,” she said. “House policy.”
    Thorp stiffened. “I’ve been playing two hands all night with other dealers,” he shot back.
    “Two hands would crowd out other players,” she snapped, shuffling the deck.
    Thorp looked around at the empty casino.
She’ll do whatever it takes to keep me from winning
.
    The dealer started rapidly shooting out cards, trying to rattle him. At last, Thorp spied the edge he’d been waiting for. Finally—
maybe—
he’d have a chance to prove the merits of his blackjack system in the real-world crucible of a casino. Twenty-eight, with dark hair and a tendency to talk out of the corner of his mouth, Thorp resembled hordes of young men who passed through Nevada’s casinos hoping to line their pockets with stacks of chips. But Thorp was different. He was a full-blown genius, holder of a Ph.D. in physics from UCLA, a professor at the Massachusetts Institute of Technology, and an expert in devising strategies to beat all kinds of games, from baccarat to blackjack.
    As night stretched into morning, Thorp had kept his bets small, wagering $1 or $2 at a time, as he fished for flaws in his system. None was apparent, yet his pile of chips kept shrinking. Lady Luck was running against him. But that was about to change. It had nothing to do with luck and everything to do with math.
    Thorp’s system, based on complex mathematics and hundreds of hours of computer time, relied primarily on counting the number of ten cards that had been dealt. In blackjack, all face cards—kings, queens, and jacks—count as tens along with the four natural tens in every deck of fifty-two cards. Thorp had calculated that when the ratio of tens left in the deck relative to other cards increased, the odds turned in his favor. For one thing, it increased the odds that the dealer would bust, since dealers always had to “hit,” or take another card, when their hand totaled sixteen or less. In other words, the more heavily a deck was stacked with ten cards, the better Thorp’s chances of beating the dealer’s hand and winning his bet. Thorp’s tens strategy, otherwise known as the hi-lo strategy, was a revolutionary breakthrough in card counting.
    While he could never be certain about which card would come next, he did know that statistically he had an edge