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Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street Paperback – Illustrated, September 19, 2006

4.5 4.5 out of 5 stars 785 ratings

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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 Las Vegas. It worked. They realized that there was even more money to be made in the stock market. Thorp used the Kelly system with his phenomenally successful hedge fund, Princeton-Newport Partners. Shannon became a successful investor, too, topping even Warren Buffett's rate of return.
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.

Shannon believed it was possible for a smart investor to beat the market―and William Poundstone's
Fortune's Formula will convince you that he was right.

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Editorial Reviews

Review

“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

About the Author

William Poundstone is the bestselling author of more than a dozen nonfiction books, including Fortune's Formula, Gaming the Vote and Priceless. His books Labyrinths of Reason and The Recursive Universe were both nominated for the Pulitzer Prize.

Product details

  • ASIN ‏ : ‎ 0809045990
  • Publisher ‏ : ‎ Hill and Wang; First Edition (September 19, 2006)
  • Language ‏ : ‎ English
  • Paperback ‏ : ‎ 386 pages
  • ISBN-10 ‏ : ‎ 9780809045990
  • ISBN-13 ‏ : ‎ 978-0809045990
  • Item Weight ‏ : ‎ 2.31 pounds
  • Dimensions ‏ : ‎ 5.4 x 1.2 x 8.2 inches
  • Customer Reviews:
    4.5 4.5 out of 5 stars 785 ratings

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William Poundstone
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William Poundstone is the author of two previous Hill and Wang books: Fortune's Formula and Gaming the Vote.

Customer reviews

4.5 out of 5 stars
785 global ratings

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Customers say

Customers find the book engaging and entertaining. They appreciate the well-presented information theory, mob history, and investment folklore. The story is well-told with interesting characters and anecdotes. Overall, customers consider the book a worthwhile read for investors, managers, and risk-takers.

AI-generated from the text of customer reviews

83 customers mention "Readability"79 positive4 negative

Customers find the book engaging and well-written. They appreciate the author's detailed style, which draws them in further with each chapter. The book is filled with good stories and explanations.

"...Before I get into the review of this excellent and very interesting book I want to relate an experience I had some years ago, sometime in the early..." Read more

"...It also is a hilarious and insightful history of gambling from the Bernoulli's in the 1700s through the hedge fund traders of the late 1990's...." Read more

"...For the most part, it is an interesting read though there are sections that bog down...." Read more

"Educational and entertaining. Warner Bros used to be owned by a company in bed with the mafia...." Read more

74 customers mention "Insight"71 positive3 negative

Customers find the book engaging and informative. They appreciate its context and educational approach. The book provides a non-mathematical narrative on historically popular betting systems and an account of the evolution of probabilistic approaches to money management.

"...Poundstone explains in detail how all this happened and it is a fascinating story...." Read more

"...the lives of a few major contributors to investment theory, information theory, and betting theory: Claude Shannon, who invented Information Theory..." Read more

"...I'd recommend the book as an interesting historical look at some people who tried to beat the house - in gambling or investing - and as a primer on..." Read more

"Educational and entertaining. Warner Bros used to be owned by a company in bed with the mafia...." Read more

15 customers mention "Story quality"15 positive0 negative

Customers find the story well-told and interesting. They appreciate the insights into Shannon's communication theory and colorful characters. The book provides entertaining anecdotes and fantastic life stories about world gamblers like Rudy Guliani, Michael Milken, and Ivan Boesky. Readers also enjoy learning the details of relationships between scientists involved in creating the money management system.

"...He is an outstanding and prolific journalist as well as an MIT grad, although I must say that the organization of the book was a bit freestyle...." Read more

"No, it's not a novel, but some of the characters in this book are soooo interesting...." Read more

"...It's a well-told biographical account of the people involved. It's not a trading / investment / gambling reference, though...." Read more

"...Also an interesting study of the people involved through the years that in one way or another built upon the work of previous studies and research...." Read more

11 customers mention "Value for money"11 positive0 negative

Customers find the book well worth the money. They say it covers stock trading, investing, personal finance, and gambling. It's an important book for investors, managers, and risk-takers.

"...This book covers stock trading, investing, casinos, parking lots (haha, yeah!) mob activities, game theory...." Read more

"...is very well researched and it contains history of gambling, and investment and how information theory evolved...." Read more

"...It's a fun mix of information theory, mob history, big-money investment folklore..." Read more

"...It's hard to classify. Economics and the stock market, personal finance, gambling primer, the development and practice of communications theory..." Read more

Isn't that a wonderful book?
5 out of 5 stars
Isn't that a wonderful book?
Right from the start, the writer engages us in an adventure of people and their passions for abnormal returns via crime or even science. The common thing between all these different but real characters is one thing: their love to be out of the norm. The real fortune that the reader gets is not from a magic formula, but from the story itself. One of the best books for speculation I have ever read.
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Top reviews from the United States

  • Reviewed in the United States on June 17, 2017
    “Fortune’s Formula” is the Kelly Criterion from J.L. Kelly Jr. who was a mathematician at Bell Labs in the 1950s. Essentially the formula gives the optimal size of bets in order to win as much as possible over time while reducing the risk of ruin. The thing for the reader to realize is that the Kelly Criterion has no utility unless the bettor or investor has an advantage. That needs to be repeated: on an even bet, such as tossing a coin the Kelly strategy is to bet nothing, zero, zilch.

    Before I get into the review of this excellent and very interesting book I want to relate an experience I had some years ago, sometime in the early 1980s. I thought I had come up with a way to bet on baseball games in Las Vegas with an advantage over the line (that is over the bookie’s vigorish). For a season I studied results compared to the betting line. I was so sure I had a clear advantage that the next problem became how to run up my money efficiently without taking the chance of going broke. In other words, non-mathematician that I am, I was seeking something like Kelly’s Criterion. And what I came up with turned out to be very similar to his formula, although I don’t recall exactly. Unfortunately when I got to Las Vegas it didn’t take me long to realize I had no advantage and therefore didn’t make any bets.

    Okay, back to the book. An excellent way to get an idea of the scope of this work is to look at the parts. Part One is titled “Entropy,” Part Two is “Blackjack,” Part Three is “Arbitrage,” Part Four is “St Petersburg Wager,” Part Five is “RICO” (Racketeer-Influenced and Corrupt Organization), Part Six is “Blowing Up,” and Part Seven is “Signal and Noise.” Along the way you will meet gangsters, the Italian and Jewish mafias, a young and very aggressive Rudolph Giuliani, the Hong Kong horseracing scene in which some people made millions (it was the only legal betting allowed by law in Hong Kong) and some keen ideas on how to make money gambling or investing. But what really makes this book so interesting is the light that Poundstone shines on two giants in the science of information, gambling and investing, namely Claude Shannon and Edward O. Thorp.

    Shannon is known as the father of information theory and in many respects as the founder of the digital world we live in today. He was also an astute investor as Poundstone reveals. I don’t think it would be an exaggeration to say that Shannon was a genius.

    Thorp first became known to the public with his book “Beat the Dealer” (first edition, 1962) which presented a winning strategy for blackjack. I read that book when I was still in my twenties with great enthusiasm but never employed the strategies since my memory is rather ordinary. Instead I played poker, but that, as they say, is another story. What is astonishing about Thorp that I learned here is that his hedge fund, Princeton-Newport Partners was one of the most successful ever. A dollar invested in the fund in 1969 would grow to $14.78 in1988. Yes, wow.

    Poundstone explains in detail how all this happened and it is a fascinating story. I’m amazed at how much work he put into this book and all the information he acquired. He is an outstanding and prolific journalist as well as an MIT grad, although I must say that the organization of the book was a bit freestyle. Additionally there are some errors and some unclear passages. Consider this on page 39: Ed Thorp (as a boy) “would buy a pack of Kool-Aid for five cents and sell the mixed beverage to hot WPA workers for one cent a glass. Ed could get six glasses from a pack for a penny profit.”

    What is not right here is that you needed to add sugar to the Kool Aid which would be an additional expense.

    On page 68, Poundstone writes: “Kelly described his idea this way: A ‘gambler with a private wire’ gets advanced word of the outcome of baseball games or horse races…”

    It’s unclear what year this was but regardless of the year you can’t get “advanced word of the outcome” of a baseball game.

    One more example: Poundstone writes: “In 1993 Ed Thorp” learned from a computer science person who “had discovered” that pro basketball teams “that had to travel to the city in which a game was played tended to do poorer than a team that didn’t have to travel. A team that had to play a number of games in a row did poorer on average than a team given more rest between games. These variables were not properly weighted in bookies’ odds.” (p. 322)

    This is not true even in 1993. The two factors mentioned are just exactly the sorts of factors that are built into the bookies’ betting line, as any serious sports bettor knows.

    Part of the pleasure in reading this book is in the way that Poundstone exposes stupidity in what would seem to be high places. Here’s a quote from Mark Rubenstein who is a professor of finance at UC Berkeley. He’s talking about the Black Monday stock market crash of October 19, 1987:

    “So improbable is such an event that it would not be anticipated to occur even if the stock market were to last for 20 billion years, the upper end of the currently estimated duration of the universe. Indeed, such an event should not occur even if the stock market were to enjoy a rebirth for 20 billion years in each of 20 billion big bangs.”

    Gee, I hope he was just funning us.

    (BTW, my baseball betting delusion came about because I used the line in the Los Angeles Herald Examiner which was a stale line that didn’t account for recency. My approach was to weight recent results more heavily that older results. When I got to Vegas and saw the Vegas line it was clear that their betting lines did indeed consider recency.)

    --Dennis Littrell, author of “The World Is Not as We Think It Is”
    19 people found this helpful
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  • Reviewed in the United States on June 25, 2008
    This book is a concise look at the evolution of formal investment theory, with continual contextual references to its ties to gambling and to organized crime. It also is a hilarious and insightful history of gambling from the Bernoulli's in the 1700s through the hedge fund traders of the late 1990's.

    The author devotes over 50 pages to notes and the index. This was appreciated since I wanted to look up more about so many of the anecdotes he included.

    Mr. Poundstone poignantly describes the downfall of high-flying firms such as LTCM, where the investment wizards went from the darlings of Wall Street to the dredges of the investment community in large part because they were so clever; and they started to believe they were infallible.

    One LTCM road-show presentation was held at the insurance company Conseco in Indianapolis. Andrew Chow, a Conseco derivatives trader, interrupted Scholes. "There aren't that many opportunities," Chow objected. "You can't make that kind of money in Treasury markets."
    Scholes snapped: "You're the reason - because of fools like you we can." (Page 281)

    Warren Buffett marveled at how "ten or 15 guys with an average IQ of maybe 170" could get themselves "into a position where they can lose all their money." That was much the sentiment of Daniel Bernoulli, way back in 1738, when he wrote: "A man who risks his entire fortune acts like a simpleton, however great may be the possible gain." (Page 291)

    He also points out the real world flaws in some theoretically appealing scams. The St. Petersburg Wager seems mathematically correct; yet it overlooks a vitally important constraint (pages 182-184). Another is the unfounded weight we unconsciously give to historical returns, as evidenced by his retelling of another Warren Buffett story:
    In a 1984 speech, Buffett asked his listeners to imagine that all 215 million Americans pair off and bet a dollar on the outcome of a coin toss. The one who calls the toss incorrectly is eliminated and pays his dollar to the one who was correct.
    The next day, the winners pair off and play the same game with each other, each now betting $2. Losers are eliminated and that day's winners end up with $4. The game continues with a new toss at doubled stakes each day. After twenty tosses, 215 people will be left in the game. Each will have over a million dollars.
    According to Buffett, some of these people will write books on their methods: "How I Turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Some will badger ivory-tower economists who say it can't be done: "If it can't be done, why are there 215 us?" "Then some business school professor will probably be rude enough to bring up the fact that if 215 million orangutans had engaged in a similar exercise, the result would be the same - 215 egotistical orangutans with 20 straight winning flips." (Page 314)

    The author follows the lives of a few major contributors to investment theory, information theory, and betting theory: Claude Shannon, who invented Information Theory and paved the way for the digital computer age; John Kelly, who developed the formula for gains with no possibility of ruin; and Edward Thorpe, who built upon these findings and beat the roulette wheels, the blackjack tables and the investment fund managers.
    It's a fast read - only 329 pages before the notes and index. I highly recommend it!
    19 people found this helpful
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  • Reviewed in the United States on September 5, 2018
    It's hard to describe what this book is. Is it a primer on betting strategies? A look at practical math? A history of mathematically inclined gamblers? A "mob" story? A manual for cash management in investing?

    The book has facets of each, though in the end, the main takeaway is the superiority of the Kelly system for managing bankrolls whether gambling or investing.

    For the most part, it is an interesting read though there are sections that bog down. I'd recommend the book as an interesting historical look at some people who tried to beat the house - in gambling or investing - and as a primer on the Kelly method but I wouldn't suggest that anyone head to Vegas or Wall St. with their kid's college savings based on this book.
    29 people found this helpful
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  • Reviewed in the United States on July 28, 2024
    Educational and entertaining. Warner Bros used to be owned by a company in bed with the mafia. The company in question owned parking lots in NYC.

    Claude Shannon is the most successful investor you’ve never heard of (founder of information theory that touches everything in your life). Even more successful than Peter Lynch, Joel Greenblatt and Warren Buffett.

    If you don’t think probabilistically this book will help you do so. You’ll make better life decisions.
    4 people found this helpful
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Top reviews from other countries

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  • Camila Zelaya
    5.0 out of 5 stars Sensacional
    Reviewed in Brazil on July 3, 2020
    Chegou antes do prazo! Amei!
  • FERNANDO DIAZ LOPEZ
    5.0 out of 5 stars Excelente libro!!
    Reviewed in Mexico on December 5, 2019
    Una lectura ampliamante recomendable para aquellas personas que les gusta el mercado de valores, las apuestas e historias de personas brillantes que incursionaron en estos temas. El libro va entrelazando personajes de manera inteligente y, al menos en mi caso, cada vez quería continuar leyendo sin parar.
  • KK
    5.0 out of 5 stars Great book for people into casinos and gambling, stock markets and wall street, or simply trying to money
    Reviewed in Canada on July 13, 2016
    This is a really interested book. I thought is started out a little slow and was hard to get into, but it picks up. It's super interesting how mathematical everything is. The book is good if you are into casinos and gambling, stock markets and wall street, or simply trying to money, as it blurs the line between wagering and investing which almost comes down to being the same thing. It is a good read and provides a fascinating look into how a couple guys developed a formula for making money.
  • Shashank V. Nerurkar
    5.0 out of 5 stars Distinct approach to betting systems and its use in investing
    Reviewed in India on February 13, 2016
    The book covers subject of scientific betting system developed by great minds like Claude Shannon and Ed Thorp. They used the system to beat casinos to start with and then used same principles to earn handsome returns in stock markets. The author has developed a dry subject into an interesting read with topics covering stories of mafias, casinos and activism of the likes of Rudy Giuliani, LTCM fiasco etc. Every story eventually leads to betting system and betting syndicates. In the process the author has explained the Kelly criterion in great details with ample examples of its practical use by successful investors and portfolio managers. We are also introduced to the genius of Claude Shannon, the father of Information Theory and Digital Revolution.The book is a must read for every serious investor. The book is highly recommended by no less than Charlie Munger.
  • mzaradzki
    5.0 out of 5 stars mixing top scientific mind and the fringe of our society
    Reviewed in France on June 2, 2012
    Entertaining from the start till the end. Another great book from Poundstone shedding lights on fabulous characters of the 20th in various fields ranging from the fringe of the society to the scientific world.
    As usual the reader will gain great insight on the many topics covered.