Fortune's Formula

From Barnes & Noble

In 1956, two Bell Labs scientists discovered a formula for getting rich. One of these lucrative thinkers was mathematician Claude Shannon, regarded by many as the founding father of the electronic communications age. The other was probability expert John L. Kelly, Jr., a colorful, gun-toting Texas-born physicist. When Shannon and another mathematician tested the "Kelly formula" at casino tables, racetracks, and stock exchange trading floors, its success was incontestable. For instance, Shannon's stock portfolio showed an annual growth rate of 28 percent. In Fortune's Formula, William Poundstone spins an amazing true story about getting rich quick.

Publishers Weekly

In 1961, MIT mathematics professor Ed Thorp made a small Vegas fortune by "counting cards"; his 1962 bestseller, Beat the Dealer, made the phrase a household word. With Claude Shannon, the father of information theory, Thorp next conquered the roulette tables. In this prosaic but fascinating cultural history, Poundstone (How Would You Move Mt. Fuji?) tells not only what they did but how they did it. For roulette, Poundstone shows, Thorp and Shannon used a betting scheme invented by Shannon's Bell Labs colleague John Kelly, eventually applying Kelly's technique to investing, resulting in long-term records of extraordinary return with low risk. (Thorp revealed the secret in 1966's Beat the Market, but investors proved harder to persuade than blackjack players.) Many other characters figure into Poundstone's entertaining saga: a forgotten French mathematician, two Nobel Prize-winning economists who declared war on the Kelly criterion, Rudy Giuliani, assorted mobsters, and winners and losers in all types of investing and gambling games. The subtitle is not a tease: the book explains and analyzes Kelly's system for turning small advantages into great wealth. The system works, but requires unusual amounts of patience, discipline and courage. The book is good fun for the rest of us. Agent, Katinka Matson at Brockman. (Sept.) Copyright 2005 Reed Business Information.

Library Journal

In 1956, Bell Labs scientists Claude Shannon and John L. Kelly Jr. used their considerable smarts to devise a formula for getting rich and applied it to gambling at its height: Las Vegas roulette and the stock market. Poundstone examines the consequences-and the seamy underside. Copyright 2005 Reed Business Information.

Kirkus Reviews

Is there a secret mathematical equation to beat the stock-market smarties and outsmart the blackjack dealers? There sure is, says this erudite author. You can bet on it. Poundstone (Carl Sagan, 1999, etc.) offers a simple formula known as the proportional Kelly criterion. Using it, you can never lose your entire bankroll, and you will have a real edge. He touts the system with scholarship and documentation. And it's all artfully packaged with diverting tales of geniuses and gangsters. There are MIT scholars and Bell Lab theorists like Claude Shannon, Ed Thorp and the eponymous J.L. Kelly, and there are the colorful gamblers and crooks from Vegas to Wall Street like Bugsy Siegel and Ivan Boesky. There's ambitious young Rudy Giuliani and irascible old Paul Samuelson. The math geeks, con men, arbitrageurs and professors contribute their respective talents to conjectures regarding horse-racing in Hong Kong and hedge-fund management in Princeton. We are given instruction in the arcana of information theory, card-counting, portfolio construction, fat-tail distributions and logarithmic utility. Thus, we are led, quite ingenuously, into B-school notions and economic theory with real math and actual graphs. If the academic medicine gets a bit thick, it goes down quite well with the sugar of entertaining anecdotes. It's those stories that provide a selective picture of our civilization, a sociological survey of how risk is taken. For a good way to manage risk, Poundstone says, he's got the horse right here. Its name is Kelly. Readers will have to decide whether to simply bet their beliefs the old-fashioned way or to sign on to the discipline of Kelly's formula. Enticing elucidation beneath goodhumored history.

From the Publisher

“Seldom have true crime and smart math been blended together so engagingly.” — The Wall Street Journal

“An amazing story that gives a big idea the needed star treatment . . . Fortune's Formula will appeal to readers of such books as Peter L. Bernstein's Against the Gods, Nassim Nicholas Taleb's Fooled by Randomness, and Roger Lowenstein's When Genius Failed. All try to explain why smart people take stupid risks. Poundstone goes them one better by showing how hedge fund Long-Term Capital Management, for one, could have avoided disaster by following the Kelly method.” —Business Week (four stars)

“’Fortune’s Formula’ may be the world’s first history book, gambling primer, mathematics text, economics manual, personal finance guide and joke book in a single volume. Poundstone comes across as the best college professor you ever hand, someone who can turn almost any technical topic into an entertaining and zesty lecture.” —The New York Times Book Review