I am often astounded by the shellacking one receives when they admit that some of their lessons were learnt in the casino. In my opinion it is in these unforgiving environments that you truly gain an appreciation of risk and survival. In fact it is in these shady halls that many of the great speculators have been forged.
Ed Thorp was no stranger to the casinos, and in fact this environment stirred his investigative curiosity to demonstrate the fallacy of some myths, for example the myth that roulette produces a purely random outcome. In fact when you dig deep enough you quickly realise that the reality of all classical systems departs from the theory where all classical systems produce deterministic as opposed to random outcomes. There is a slight bias arising in all classical physical systems that can be exploited…however the question is really about whether the effort to detect this bias is worth ‘the candle’.
The problem with the reality of complex systems is that the level of determinism is intractable in nature, but this simply means that it is practically impossible to acquire perfect information about the path taken from the initial state to the final outcome. It is not like a quantum system, where you meet impossibility of measurement head on with the non-locality or the counterfactual indefiniteness of objects arising from the Uncertainty Principle.
Ed and his penchant for mathematics and physics allowed him to determine within a level of confidence the likely quadrant of numbers that a roulette ball would fall into with the application of physical principles and an understanding of the initial state of the system….but he needed a miniature computer to handle the solutions. He further demonstrated the ability to use card counting as a method to tilt the odds in the favour of the blackjack player. It was not that Ed wanted to make his millions in the casinos of the world, but rather it was the passion of problem solving, the pursuit of the scientific method and the challenging of conventional dogma that drove him. Never accept anything as fact on face value or hearsay. Test it yourself.
So with this skill set, you can imagine what he brought to the world of investment when he was drawn to the puzzles of the financial markets. It is time to take a tour within the fascinating world of Ed Thorp.