The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Read Online Free Page B
Author: Scott Patterson
the parked assemblage like a cop with a spotlight, laughing as frantic teens panicked and sped away.
During high school, Thorp started thinking about gambling. One of his favorite teachers returned from a trip to Las Vegas full of cautionary tales about how one player after another got taken to the cleaners at the roulette table. “You just can’t beat these guys,” the teacher said. Thorp wasn’t so sure. Around town, there were a number of illegal slot machines that would spit out a stream of coins if the handle was jiggled in just the right way. Roulette might have a similar hidden weakness, he thought, a
statistical
weakness.
Thorp was still thinking about roulette in his second year of graduate school physics at UCLA, in the spring of 1955. He wondered if he could discover a mathematical system to consistently win at roulette. Already he was thinking about how to use mathematics to describethe hidden architecture of seemingly random systems—an approach he one day would wield on the stock market and develop into a theory that lies at the heart of quant investing.
One possibility was to find a roulette wheel with some kind of defect. In 1949, two roommates at the University of Chicago, Albert Hibbs and Roy Walford, found defects in a number of roulette wheels in Las Vegas and Reno and made several thousand dollars. Their exploits had been written up in
Life
magazine. Hibbs and Walford had been undergraduate students at the California Institute of Technology in Pasadena, and their accomplishments were well known to astute denizens of Caltech’s neighbor, UCLA.
Thorp believed it was possible to beat roulette even without help from flaws in the wheel. Indeed, the absence of defects made it easier, since the ball would be traveling along a predictable path, like a planet in orbit. The key: because croupiers take bets after the ball is set in motion, it is theoretically possible to determine the position and velocity of the ball and rotor, and to predict approximately which pocket the ball will fall into.
The human eye, of course, can’t accomplish such a feat. Thorp dreamed of a wearable computer that could track the motion of ball and wheel and spit out a prediction of where it would land. He believed he could create a machine that would statistically forecast the seemingly random motion of a roulette wheel: an observer would don the computer and feed in information about the speed of the wheel; a bettor, some distance away, would receive information via a radio link.
Thorp purchased a cheap half-scale wheel and filmed it in action, timing the motion with a stopwatch that measured in splits of hundredths of a second. Thorp soon realized that his cheap wheel was too riddled with flaws to develop a predictive system. Disappointed, he tabled the idea as he worked to finish graduate school. But it gnawed at him, and he continued to fiddle with experiments.
One evening, his in-laws visited him and his wife, Vivian, for dinner. They were surprised when Thorp didn’t greet them at the door and wondered what he was up to. They found him in the kitchen rolling marbles down a V-shaped trough and marking how far the marbles spun across the kitchen floor before stopping. Thorp explained that hewas simulating the path of an orbiting roulette ball. Surprisingly, they didn’t think their daughter had married a lunatic.
The Thorps made their first visit to Las Vegas in 1958, after Thorp had finished his degree and begun teaching. The frugal professor had heard that the rooms were cheap, and he was still toying with the idea of beating roulette. The smoothness of the wheels in Las Vegas convinced Thorp that he could predict the outcome. Now he just needed a solid, regulation-size wheel and suitable laboratory equipment.
Thorp had also decided to try out a blackjack strategy he’d recently come across. The strategy was from a ten-page article in the
Journal of the American Statistical Association
by U.S. Army mathematician
During high school, Thorp started thinking about gambling. One of his favorite teachers returned from a trip to Las Vegas full of cautionary tales about how one player after another got taken to the cleaners at the roulette table. “You just can’t beat these guys,” the teacher said. Thorp wasn’t so sure. Around town, there were a number of illegal slot machines that would spit out a stream of coins if the handle was jiggled in just the right way. Roulette might have a similar hidden weakness, he thought, a
statistical
weakness.
Thorp was still thinking about roulette in his second year of graduate school physics at UCLA, in the spring of 1955. He wondered if he could discover a mathematical system to consistently win at roulette. Already he was thinking about how to use mathematics to describethe hidden architecture of seemingly random systems—an approach he one day would wield on the stock market and develop into a theory that lies at the heart of quant investing.
One possibility was to find a roulette wheel with some kind of defect. In 1949, two roommates at the University of Chicago, Albert Hibbs and Roy Walford, found defects in a number of roulette wheels in Las Vegas and Reno and made several thousand dollars. Their exploits had been written up in
Life
magazine. Hibbs and Walford had been undergraduate students at the California Institute of Technology in Pasadena, and their accomplishments were well known to astute denizens of Caltech’s neighbor, UCLA.
Thorp believed it was possible to beat roulette even without help from flaws in the wheel. Indeed, the absence of defects made it easier, since the ball would be traveling along a predictable path, like a planet in orbit. The key: because croupiers take bets after the ball is set in motion, it is theoretically possible to determine the position and velocity of the ball and rotor, and to predict approximately which pocket the ball will fall into.
The human eye, of course, can’t accomplish such a feat. Thorp dreamed of a wearable computer that could track the motion of ball and wheel and spit out a prediction of where it would land. He believed he could create a machine that would statistically forecast the seemingly random motion of a roulette wheel: an observer would don the computer and feed in information about the speed of the wheel; a bettor, some distance away, would receive information via a radio link.
Thorp purchased a cheap half-scale wheel and filmed it in action, timing the motion with a stopwatch that measured in splits of hundredths of a second. Thorp soon realized that his cheap wheel was too riddled with flaws to develop a predictive system. Disappointed, he tabled the idea as he worked to finish graduate school. But it gnawed at him, and he continued to fiddle with experiments.
One evening, his in-laws visited him and his wife, Vivian, for dinner. They were surprised when Thorp didn’t greet them at the door and wondered what he was up to. They found him in the kitchen rolling marbles down a V-shaped trough and marking how far the marbles spun across the kitchen floor before stopping. Thorp explained that hewas simulating the path of an orbiting roulette ball. Surprisingly, they didn’t think their daughter had married a lunatic.
The Thorps made their first visit to Las Vegas in 1958, after Thorp had finished his degree and begun teaching. The frugal professor had heard that the rooms were cheap, and he was still toying with the idea of beating roulette. The smoothness of the wheels in Las Vegas convinced Thorp that he could predict the outcome. Now he just needed a solid, regulation-size wheel and suitable laboratory equipment.
Thorp had also decided to try out a blackjack strategy he’d recently come across. The strategy was from a ten-page article in the
Journal of the American Statistical Association
by U.S. Army mathematician
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