Edward Thorp Casino

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Thorp – Pioneer of Blackjack Literature. There’s a strong chance that the average person on the street has never heard of Edward O. For those who engage in blackjack or hedge fund management on a regular basis, however, his name may loom as large as anyone else in those fields of endeavor. Thorp's life story reads like fiction (or fantasy)—from his time in Las Vegas, where he perfected how to beat the casino, to his tenure leading a financial institution, where he helped. Thorp Edward O Thorp is widely known as the author of the 1962 Beat the Dealer, which was the first book to prove mathematically that blackjack could be beaten by card counting, and the 1967 Beat the Market, which showed how warrant option markets could be priced and beaten. The man behind the name, 'Fortune's Formula,' is a living legend: Edward O. In 1958 Thorp was a young, up and coming professor at MIT. He went to Las Vegas on a holiday vacation and experimented with a blackjack strategy about which he recently read. Successful Casino Raids. Edward Oakley Thorp was born in 1932 in Chicago. After receiving his Ph.D. In 1958 from the University of California he went on to teach mathematics at MIT. There he develops his theory of card counting to maximize the chances of winning in the long run.

Advantage gambling has a long history beyond the realms of sports betting. The value bettor of today is the blackjack card counter of yesterday. Indeed, if you set your mind on beating a game of chance, you will see opportunities where nobody else assumed they existed. If you come up with your original idea you have a good chance of making a fortune. The stories of those who did inspire anyone who has set the goal of beating the betting markets. Today I would like to tell you the fascinating story of the men who cracked the roulette – Ed Thorp.

If you a regular follower of this blog, you have already read my article on Bill Benter and his horse racing model. In fact, Bill Benter was inspired by Ed Thorp’s book on blackjack card counting to become a professional gambler. In a sense, Ed Thorp has started a lineage of the sport’s betting greatest. So we could say this article is about where it all began. Let’s see.

Ed Thorp: The life of an advantage gambler

Ed Thorp was born in a low-middle class family. Due to his mathematical talent, he managed to start a promising academic career. After getting his physics degree, Thorp was admitted to a PhD in mathematics from UCLA (University of California, Los Angeles), which he graduated in 1958. Reportedly, this is where his academic interest in gambling started to grow. After his graduation, Thorp has worked as a professor in MIT, New Mexico State University and University of California, Irvine.

From mathematics to Blackjack

In the meantime, Thorp developed his theories in games of chance further. Even though Thorp was pursuing an academic career, he was not afraid to apply his theories in practice. His most notable research (and the one that would later on grant him a widespread recognition) was in the field of blackjack. Thorp developed a winning card-counting scheme and in association with pro-gambler and notable undeground figure Manny Kimmel, made his first profits in Vegas casinos.

Ed Thorp’s 10 Count System

The card counting system of Ed Thorp took advantage of the fact that casinos were not reshuffling the deck before it was dealt to the end. Observing the cards leaving the deck, the relatively simple system calculated the chances to be dealt a good card from what is left.

Ed Thorp managed to prove that the system worked in practice as well as in theory. His discovery prompted him to write the best selling book Beat the Dealer, which laid down his system in detail. This was the first blackjack card-counting system made available to the general public. The book educated the first generation of smart punters, that would use their newly learned system to try and beat the casino, among which was the very William Benter.

Unfortunately the system in itself is insufficient to beat the casino nowadays. Today, casinos shuffle cards way before the end of the deck. However, it has been the basis for some more sophisticated blackjack card-counting systems to follow. Thorp’s contribution to the field of blackjack earned him a place in the Blackjack Hall of Fame

Stepping it up – association with Claude Shannon

Ed Thorp was starting to feel the taste of success, but his biggest hit was yet to come. Directing his effort away from shady illegal bookmakers and towards some of the brightest minds he encountered in his tenure as a mathematics professor, Thorp started working with Claude Shannon to find new edges on the gambling market.

Who is Claude Shannon

Claude Shannon was an early associate of John Kelly (yes, that Kelly) in Bell Labs. The two have worked together in the field of game theory and were well aware of each others work. This would lead to Shannon being among the first to recognize the potential of the Kelly criterion and apply it successfully to gambling and investing.

Shannon became famous for his research in the field of combined application of electricity and algebra to solve numerical problems, which earned him the nickname “the father of information theory”. It is safe to say that Shannon laid the foundation for the discovery of the modern computer.

And what else would the father of information theory do in his spare time, than find ways to crack the roulette.

Ed Thorp and Claude Shannon’s joint venture: Cracking the Roulette

It was known at the time that it is impossible to beat a balanced roulette. In its most popular format, the roulette has 36 red and black sections. Those are offering a 1/36 chance to pay you 36 times your stake, for an expected value of zero each. Then comes the green 0, which doesn’t win you anything and represents the house edge (and negative expected value for the gambler from the game) of 1/37 or around 2.7%. Pretty simple and very random game known to be EV- is what the roulette was at the time.

But was it really that random?

The question Throp and Shannon asked themselves was, is the roulette really random? After careful observation they have noticed some patterns of behaviour from the dealers, who were rolling the wheel.

In order for a casino to maximize its profit, the roulette must roll as many times as possible. This puts pressure on the dealer to run the wheel as quickly as he can. A good dealer would therefore be one that can learn to do the turns as seamlessly and automatically as possible. It is a skill that is acquired in time and the experienced dealers in Vegas casinos seemed to have it.

However, what this learned automation leads to, was that a dealer would (unknowingly to himself) tend to roll the wheel exactly a certain amount of times every time he rolls. A novice dealer would make, say, 27 to 31 rolls of the wheel. An experienced one, on the other hand would stay between 28 ¾ and 29 ¼.

The edge this discovery could yield was massive. Restricting the possible number of outcomes by half could enormously increase the EV of the gambler. He only needed to identify in which area of the wheel the ball was expected to land. To find this out was a difficult problem. But not so much for Thorp and Shannon.

The first wearable computer

Chances are you already have seen one of these:

The iWatch is the Apple model of a smartwatch, a.k.a. a wearable computer. Those things are quite popular nowadays. Their uses include measuring your heart rate while doing sports, checking the weather or making a phone call. But they were actually invented for gambling by, you guessed it, Ed Thorp and Claude Shannon. In other words, none of those fancy gadgets that millions of people are wearing today wouldn’t have existed, if not for those two smart men spending months sitting and thinking of ways to make some money on the roulette in Vegas. Remember that for the next time someone tells you gambling is immoral or a zero-sum game.

The two have tested the prototype of the first wearable computer in Shannon’s home basement in 1961. After the tests were successful, they have put it to good use in a number of casinos. The computer was counting the revolutions of the wheel and transferred the results via an electrical signal. It then transformed the signal into a sound played into the player’s ear, in what was an early form of a micro earpiece. Granted, the whole thing was a bit bulky and nothing that you can sell in an iStore nowadays. But it did the work, allowing its wearer to place a roulette wager with an estimated 44% edge over the house.

A money-printing machine?

The edge was indeed massive and there was enough unassuming casinos around there willing to take the action. This is not to say the scheme didn’t have its weak spots. For example, the connection to the earpiece was causing a lot of trouble. Therefore, it had to be fixed live every now and then, as Thorp recalls. Nevertheless, partly as a result of Thorp and Shannon’s invention, the state of Nevada banned the use of wearable devices in casinos later in 1985.

Today, the wearable computer is part of the exhibition of the MIT Museum in Cambridge, Mass.

What came next?

It quickly became apparent that for a mind of the caliber of Thorp, sharp gambling is too small of a playing field. Thorp applied his earned capital and mathematical insights in the financial market, which has since earned him hundreds of millions of dollars. However, he will always have a special place in hearts and minds of the gambling community due to his contributions to the field. Thorp’s work inspired the first generation of smart gamblers, who would employ mathematical and statistical models and use the assistance of electronic devices to win in games of chance.

From there on, the computer model of Bill Benter that beat the racetrack was only a matter of time and, of course, finding the right man for the job. Until today, when all sorts of sophisticated algorithms are being applied en masse to predict the outcome of a sporting event and beat the betting market. It was a fascinating development, that opened great opportunities in front of mathematically gifted people, but also continuously narrowed the playing field for everyone else. We shall see what the future brings in that regard.

Ed Thorp on the web

If you would like to dive deeper into Throp’s life story you can check his biography. It lays out the details around his discoveries and includes many interesting anecdotes. Furthermore, on Mr. Thorp’s website, you can find, among other things, a lot of great free articles on the topics of finance and gambling written by him, where you can learn a thing or two about his methods.

Finally, The Investor’s Podcast has done an interview with Ed Thorp, where you could hear the man speak:

As is obvious from the name of the podcast, the episode revolves more around finance. I find it an interesting piece nevertheless.

Conclusion

This was my report on the fascinating story of Ed Thorp and his gambling success. Being perhaps the first prominent advantage gambler, Ed Thorp contributed tremendously to the fields of blackjack, roulette and games of chance in general. Furthermore, he was ready to share chunks of his knowledge along the way by writing bestselling books and regularly appearing in the public via interviews or his own writings. In that way, he paved the way for many future betting legends such as Bill Benter, Zeljko Ranogajec, Tony Bloom and others.

The road to success is long and hard, but I hope Ed Thorp’s story gave you some inspiration to continue on your betting journey and perhaps a few ideas to work on. Next in line I have a few articles in mind about live betting, the progress of my LoL model and some interesting betting tools. If you subscribe to my Twitter channel and my newsletter on the upper-right corner of your screen, you will make sure not to miss any of these. I hope you enjoyed the article and see you around!

(Redirected from Edward O Thorp)

Born	August 14, 1932 (age 88) Chicago, Illinois, U.S.
Citizenship	American
Alma mater	UCLA
Scientific career
Fields	Probability theory, Linear operators
Institutions	UC Irvine, New Mexico State University, MIT
Thesis	Compact Linear Operators in Normed Spaces(1958)
Doctoral advisor	Angus E. Taylor
Influences	Claude Shannon

Edward Oakley Thorp (born August 14, 1932) is an American mathematics professor, author, hedge fund manager, and blackjack researcher. He pioneered the modern applications of probability theory, including the harnessing of very small correlations for reliable financial gain.

Thorp is the author of Beat the Dealer, which mathematically proved that the house advantage in blackjack could be overcome by card counting.^[1] He also developed and applied effective hedge fund techniques in the financial markets, and collaborated with Claude Shannon in creating the first wearable computer.^[2]

Thorp received his Ph.D. in mathematics from the University of California, Los Angeles in 1958, and worked at the Massachusetts Institute of Technology (MIT) from 1959 to 1961. He was a professor of mathematics from 1961 to 1965 at New Mexico State University, and then joined the University of California, Irvine where he was a professor of mathematics from 1965 to 1977 and a professor of mathematics and finance from 1977 to 1982.^[3]

Computer-aided research in blackjack[edit]

Thorp used the IBM 704 as a research tool in order to investigate the probabilities of winning while developing his blackjack game theory, which was based on the Kelly criterion, which he learned about from the 1956 paper by Kelly.^[4]^[5]^[6]^[7] He learned Fortran in order to program the equations needed for his theoretical research model on the probabilities of winning at blackjack. Thorp analyzed the game of blackjack to a great extent this way, while devising card-counting schemes with the aid of the IBM 704 in order to improve his odds,^[8] especially near the end of a card deck that is not being reshuffled after every deal.

Applied research in Reno, Lake Tahoe and Las Vegas[edit]

Thorp decided to test his theory in practice in Reno, Lake Tahoe, and Las Vegas.^[6]^[8]^[9]Thorp started his applied research using $10,000, with Manny Kimmel, a wealthy professional gambler and former bookmaker,^[10] providing the venture capital. First they visited Reno and Lake Tahoe establishments where they tested Thorp's theory at the local blackjack tables.^[9] The experimental results proved successful and his theory was verified since he won $11,000 in a single weekend.^[6] Casinos now shuffle well before the end of the deck as a countermeasure to his methods. During his Las Vegas casino visits Thorp frequently used disguises such as wraparound glasses and false beards.^[9] In addition to the blackjack activities, Thorp had assembled a baccarat team which was also winning.^[9]

News quickly spread throughout the gambling community, which was eager for new methods of winning, while Thorp became an instant celebrity among blackjack aficionados. Due to the great demand generated about disseminating his research results to a wider gambling audience, he wrote the book Beat the Dealer in 1966, widely considered the original card counting manual,^[11]which sold over 700,000 copies, a huge number for a specialty title which earned it a place in the New York Times bestseller list, much to the chagrin of Kimmel whose identity was thinly disguised in the book as Mr. X.^[6]

Thorp's blackjack research^[12] is one of the very few examples where results from such research reached the public directly, completely bypassing the usual academic peer review process cycle. He has also stated that he considered the whole experiment an academic exercise.^[6]

In addition, Thorp, while a professor of mathematics at MIT, met Claude Shannon, and took him and his wife Betty Shannon as partners on weekend forays to Las Vegas to play roulette and blackjack, at which Thorp was very successful.^[13]His team's roulette play was the first instance of using a wearable computer in a casino — something which is now illegal, as of May 30, 1985, when the Nevada devices law came into effect as an emergency measure targeting blackjack and roulette devices.^[2]^[13] The wearable computer was co-developed with Claude Shannon between 1960–61. Thefinal operating version of the device was tested in Shannon's home lab at his basement in June 1961.^[2] His achievements have led him to become an inaugural member of the Blackjack Hall of Fame.^[14]

He also devised the 'Thorp count', a method for calculating the likelihood of winning in certain endgame positions in backgammon.^[15]

Stock market[edit]

Since the late 1960s, Thorp has used his knowledge of probability and statistics in the stock market by discovering and exploiting a number of pricing anomalies in the securities markets, and he has made a significant fortune.^[5] Thorp's first hedge fund was Princeton/Newport Partners. He is currently the President of Edward O. Thorp & Associates, based in Newport Beach, California. In May 1998, Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years.^[16]

Bibliography[edit]

(Autobiography) Edward O. Thorp, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market, 2017. [1]
Edward O. Thorp, Elementary Probability, 1977, ISBN0-88275-389-4
Edward Thorp, Beat the Dealer: A Winning Strategy for the Game of Twenty-One, ISBN0-394-70310-3
Edward O. Thorp, Sheen T. Kassouf, Beat the Market: A Scientific Stock Market System, 1967, ISBN0-394-42439-5 (online pdf, retrieved 22 Nov 2017)
Edward O. Thorp, The Mathematics of Gambling, 1984, ISBN0-89746-019-7 (online version part 1, part 2, part 3, part 4)
Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone
The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic Series), ISBN978-9814293495, February 10, 2011 by Leonard C. MacLean (Editor), Edward O. Thorp (Editor), William T. Ziemba (Editor)

References[edit]

^Peter A. Griffin (1979) The Theory of Blackjack, Huntington Press, ISBN978-0929712130
^ ^a^b^cEdward O. Thorp. 'The Invention of the First Wearable Computer'(PDF). Edward O. Thorp & Associates. Retrieved April 26, 2010.
^'Founding professor of math donates personal, professional papers to UCI Libraries'. UCI News. UC Irvine. June 12, 2018.
^Understanding Fortune’s Formula by Edward O. Thorp Copyright 2007 Quote: 'My 1962 book Beat the Dealer explained the detailed theory and practice. The “optimal” way to bet in favorable situations was an important feature.In Beat the Dealer I called this, naturally enough, “The Kelly gambling system,” since I learned about it from the 1956 paper by John L. Kelly.'
^ ^a^bTHE KELLY CRITERION IN BLACKJACK, SPORTS BETTING, AND THE STOCK MARKET by Edward O. Thorp Paper presented at: The 10th International Conference on Gambling and Risk Taking Montreal, June 1997
^ ^a^b^c^d^eDiscovery channel documentary series: Breaking Vegas, Episode: 'Professor Blackjack' with interviews by Ed and Vivian Thorp
^The Tech (MIT) 'Thorpe, 704 Beat Blackjack' Vol. 81 No. I Cambridge, Mass., Friday, February 10, 1961
^ ^a^b'American Scientist online: Bettor Math, article and book review by Elwyn Berlekamp'. Archived from the original on April 23, 2007. Retrieved March 18, 2006.CS1 maint: BOT: original-url status unknown (link)
^ ^a^b^c^dIt's Bye! Bye! Blackjack Edward Thorp, the pensive professor above, is shaking the gambling world with a system for beating a great card game. He published it a year ago, and now the proof is in: it works David E. Scherman January 13, 1964 pp. 1–3 from SI Vault (beta)(CNN) Quotes: 'The unlikely trio was soon on its way to Reno and Lake Tahoe, where Thorp's horn-rimmed glasses, dark hair and fresh, scrubbed face hardly struck terror into the pit bosses. (p. 1)', 'But Edward Thorp and his computer are not done with Nevada yet. The classiest gambling game of all—just ask James Bond—is that enticing thing called baccarat, or chemin de fer. Its rules prevent a fast shuffle, and there is very little opportunity for hanky-panky. Thorp has now come up with a system to beat it, and the system seems to work. He has a baccarat team, and it is over $5,000 ahead. It has also been spotted and barred from play in two casinos. Could it be bye-bye to baccarat, too? (p. 1)' and 'But disguises frequently work. Thorp himself now uses a combination of wraparound glasses and a beard to change his appearance on successive Las Vegas visits. (p. 3)'
^Breaking Vegas “Professor Blackjack.”Archived December 21, 2008, at the Wayback Machine Biography channel Rated: TVPG Running Time: 60 Minutes Quote: 'In 1961, lifelong gambler Manny Kimmel, a 'connected' New York businessman, read an article by MIT math professor Ed Thorp claiming that anyone could make a fortune at blackjack by using math theory to count cards. The mob-connected sharpie offered the young professor a deal: he would put up the money, if Thorp would put his theory to action and card-count their way to millions. From Thorp's initial research to the partnership's explosive effect on the blackjack landscape, this episode boasts fascinating facts about the game's history, colorful interviews (including with Thorp), and archival footage that evokes the timeless allure and excitement of the thriving casinos in the early `60s. '
^'Blackjack Hero profile'. Blackjackhero.com. Retrieved April 26, 2010.
^A favorable strategy for twenty-one. Proceedings of the National Academy of Sciences 47 (1961), 110-112
^ ^a^b'Poundstone, William: Fortune's Formula : The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street'. Retrieved April 26, 2010.
^Anthony Curtis. 'Las Vegas Advisor on Ed Thorp'. Lasvegasadvisor.com. Retrieved April 26, 2010.
^Chuck Bower (January 23, 1997). 'Cube Handling in Races: Thorpe count'. bkgm.com. Backgammon Galore. Retrieved May 8, 2013.
^'Thorp's market activities'. Webhome.idirect.com. Archived from the original on October 31, 2005. Retrieved April 26, 2010.

Sources[edit]