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

according to one of the most fundamental rules in probability theory: the law of large numbers. The rule states that as a sample of random events, such as coin flips—or hands in a game of blackjack—increases, the expected average also becomes more certain. Ten flips of a coin could produce seven heads and three tails, 70 percent heads, 30 percent tails. But tenthousand flips of a coin will
always
produce a ratio much closer to 50–50. For Thorp’s strategy, it meant that because he had a statistical edge in blackjack, he might lose some hands, but if he played enough hands he would always come out on top—as long as he didn’t lose all of his chips.
    As the cards shot from the dealer’s hands, Thorp saw through his exhaustion that the game was tipping his way. The deck was packed full of face cards.
Time to roll
. He upped his bet to $4 and won. He let the winnings ride and won again. His odds, he could tell, were improving.
Go for it
. He won again and had $16, which turned into $32 with the next hand. Thorp backed off, taking a $12 profit. He bet $20—and won. He kept betting $20, and kept winning. He quickly recovered his $100 in losses and then some.
Time to call it a night
.
    Thorp snatched up his winnings and turned to go. As he glanced back at the dealer, he noticed an odd mixture of anger and awe on her face, as if she’d caught a glimpse of something strange and impossible that she could never explain.
    Thorp, of course, was proving it wasn’t impossible. It was all too real. The system worked. He grinned as he stepped out of the casino into a warm Nevada sunrise. He’d just beaten the dealer.
    Thorp’s victory that morning was just the beginning. Soon he would move on to much bigger game, taking on the fat cats on Wall Street, where he would deploy his formidable mathematical skills to earn hundreds of millions of dollars. Thorp was the original quant, the trailblazer who would pave the way for a new breed of mathematical traders who decades later would come to dominate Wall Street—and nearly destroy it.
    Indeed, many of the most important breakthroughs in quant history derived from this obscure, puckish mathematician, one of the first to learn how to use pure math to make money—first at the blackjack tables of Las Vegas and then in the global casino known as Wall Street. Without Thorp’s example, future financial titans such as Griffin, Muller, Asness, and Weinstein might never have converged on the St. Regis Hotel that night in March 2006.

    Edward Oakley Thorp was always a bit of a troublemaker. The son of an army officer who’d fought on the Western Front in World War I, he was born in Chicago on August 14, 1932. He showed early signs of math prowess, such as mentally calculating the number of seconds in a year, by the time he was seven. His family eventually moved to Lomita, California, near Los Angeles, and Thorp turned to classic whiz kid mischief. Left alone much of the time—during World War II, his mother worked the swing shift at Douglas Aircraft and his father worked the graveyard shift at the San Pedro shipyard—he had the freedom to let his imagination roam wild. Blowing things up was one diversion. He tinkered with small homemade explosive devices in a laboratory in his garage. With nitroglycerine obtained from a friend’s sister who worked at a chemical factory, he made pipe bombs to blow holes in the Palos Verdes wilderness. In his more sedate moments, he operated a ham radio and played chess with distant opponents over the airwaves.
    He and a friend once dropped red dye into the Plunge at Long Beach, then California’s largest indoor pool. Screaming swimmers fled the red blob, and the incident made the local paper. Another time, he attached an automobile headlight to a telescope and plugged it into a car battery. He hauled the contraption to a lovers’ lane about a half mile from his home and waited for cars to line up. As car windows began to fog, he hit a button and lit up