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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
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Sales rank 382,104
Customers rating (based on 61 reviews)
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In 1956 two Bell Labs scientists discovered the scientific formula for getting rich. One was mathematician Claude Shannon, neurotic father of our digital age, whose genius is ranked with Einstein's. The other was John L. Kelly, Jr., a Texas-born, gun-toting physicist. Together they applied the science of information theory-the basis of computers and the Internet-to the problem of making as much money as possible, as fast as possible. Shannon and MIT mathematician Edward O. Thorp took the "Kelly formula" to the roulette and blackjack tables of Las Vegas. It worked. They realized that there was even more money to be made in the stock market, specifically in the risky trading known as arbitrage. Thorp used the Kelly system with his phenomenonally successful hedge fund Princeton-Newport Partners. Shannon became a successful investor, too, topping even Warren Buffett's rate of return and using his wealth to drop out of the scientific world. Fortune's Formula traces how the Kelly formula sparked controversy even as it made fortunes at racetracks, casinos, and trading desks. It reveals the dark side of this alluring scheme, which is founded on exploiting an insider's edge. The cast of character spans J. Edgar Hoover, Rudolph Giuliani, Michael Milken and Warren Buffett; Hollywood producers, Wall Street crooks, snarky Nobel Laureates, and the Jewish mob. Fortune's Formula explores a new and surprising side to the Shannon legacy. Based in part on Shannon's previously unseen personal records as well as interviews with both of Shannon's wives, Thorp, and many others, it is the first full-length treatment of a subject that is changing ideas about finance. Claude Shannon believed it was possible for a smart investor to beat the market - and Fortune's Formula will convince you he was right.
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| Publisher | Hill and Wang | | Release date | 09/2005 | | Availability | | | Edition | Hardcover |
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An interesting history, no math
Poundstone does not know from math, but the book's portraits of Thorp and Shannon (two foundational figures in different fields) are quite interesting. What is also interesting is his discussion of "academic dogma vs reality", which shows that economics is much more "social" than a "science" (with scary consequences for our health and wellbeing, since our fearless leaders (eg, Bernanke and Summers) are academic economists.
The Kelly formula itself, while interesting, is of dubious utility in the stock market, except as a philosophical guideline.
 Kelly formula for calculating investment bets
I picked up this book because Mohnish Pabrai, the author of The Dhandho Investor, recommended it. The author describes the Kelly Formula that was developed by John Kelly at Bell Labs in New Jersey and applied by the individuals featured in the book. The formula calculates the optimal fraction of one's bankroll to bet on a favorable bet.
Edge/Odds = Fraction of one's bankroll to bet each time
For example, if you have a 50% chance of winning $100, and 50% chance of losing $50, how much do you bet? According to the formula, your edge = (50% x $100) + (50% x - $50) = $25. The odds are what you win, which in this case is $100. So the Kelly Formula is $25/$100 = 25%. This means that under this scenario, you bet 25% of your bankroll.
This is an interesting book and I recommend it to other readers.
- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market
Quick, entertaining, informative
FF is a gentle introduction to information science and the 'science' of gambling and the stock market. Well worth the read. Fans of WP might be interested to know: FF is something of a departure from WP's earlier books, which are generally both rigorous and challenging treatments of their subject matter. FF is altogether in the popular science mode -- light on rigor and challenge. Whereas WP's earlier books took me some time to read and digest, I dispensed with FF in an afternoon. All in all, though, a very pleasurable afternoon.
 adjectively and adverbly stretched introduction to the subject
The cover says this is the "untold story" and it's no wonder why--I really wonder if William Poundstone is enjoying playing a great joke on his agent and publisher - or helping them put over a huge joke on us. The back of the book says it's an "amazing story that gives a big idea the star treatment" which I now realize meant the main points of the book could have been summed up in much less space, if only all the Homerian adjectives preceeding each name and place (and liberal scattering of adverbs describing each phone call) were eliminated. The thing you ultimately realize as you are reading what you think is going to be a great story that will clue you in to gambling and Wall Street, is that he isn't really going to tell you very much beyond what you already read in Wikipedia plus some names, places, and obscure trivia that you don't need to know. (unless you really wanted to know that his career was ended "decisively," or that he entered another person's office to borrow a book) After a while I felt like a putz for buying this stretched-out magazine article at retail, and I needed a vacation from the adrenaline I was feeling from all the hyped-up prose. Either the literary reviewers who suckered me into buying this only read the prologue or they really are that mentally challenged. Don't cry for me though, I know Amazon won't put a 1-star review at the top so I'll make my money back selling it used to the next sucker.
Enjoyable and inspiring tale
It might be a matter of personal taste, since I've found other reviewers with exactly the opposite opinion, but I really enjoyed the book and, given the fact that English is not my first language, it can't be possibly be written as badly as they say. Nevertheless, I found the book truly inspiring. It displays the unlikely social networks that can be build in a complex society, the risks people take, and the rewards some win. I didn't expect a course on "applied Kelly criterion" and much less the ultimate formula to give me advantage in the financial markets or other bet-like places, but a tale about Shannon, Ed. Thorp, Manny Kimmel, the boys at LTCM, etc. Those people who want a course on that should refer to anything derived from Bachelier/Markowitz. Those who like reading for reading, this is an interesting story about gambling.
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