Finance

The Hedge Fund Legend Who Got His Start Counting Cards In Vegas

Beat the Dealer
.

Over at the Big Picture, Barry Ritholtz interviews Scott Patterson, the author of The Quants, a book on the math-driven traders who took over Wall Street.

There's a great back and forth about Ed Thorp, a guy who got a Ph.D. in math, invented modern card counting in blackjack, and went on to launch the first quant fund.

Q: Ed Thorp is seen as the father of the quantitative approach, he started out with 'Beat the Dealer.' This is a consistent theme, we see these guys playing blackjack, going to Vegas, playing poker. ...

A: ... he learned how to beat these games in Las Vegas in a way that he didn’t have to gamble, that was his whole point, that I’m not gambling with my money. For him, it wasn’t about the money. ...

Q: Not about the money, but rather just demonstrating that a rule-driven, systemic approach to uncertain probabilistic systems can generate alpha. As long as we’re making the right bets, you’re not going to win every deal, but over the course of time, the high probabilistic bets are significantly going to out-perform random bets.

A: Right, it's totally probabilities with blackjack, you never know if you’re going to win the next hand or not, but you know you’re going to win 55 percent of the next 200 hands ...

The whole story of him going to Vegas backed by these mobsters in New York, Manny Kimmel, he didn’t even know these guys were mobsters, because he’s sort of this pie in the sky professor.

It’s a great story, then he starts putting computers in his shoes. It’s a crazy story. He’s a mad scientist, he’s like a kid messing around in his garage, tinkering with things, he’s hanging out with Claude Shannon, who’s one of the most brilliant people of the 20th century, the father of information theory.

I thought it was so fascinating, this guy who came out of this world, this MIT math world, hanging out with Claude Shannon, ended up becoming really the first quant fund.

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