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


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Product details

  • Paperback: 386 pages
  • Publisher: Hill & Wang (19 Sept. 2006)
  • Language: English
  • ISBN-10: 0809045990
  • ISBN-13: 978-0809045990
  • Product Dimensions: 14 x 2.8 x 20.8 cm
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (19 customer reviews)
  • Amazon Bestsellers Rank: 37,941 in Books (See Top 100 in Books)

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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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7 of 7 people found the following review helpful By DigiTAL on 3 Mar. 2011
Format: Paperback Verified Purchase
This book is an entertaining and non-technical biography of the Kelly criterion -- a betting equation which shows you how much of your wealth to bet on each round of a profitable gamble so as to maximise the growth rate of your wealth.

Suppose you might a biased coin which will land heads twice as often as tails. A fellow gambler is willing to offer even odds against heads; how much should you bet on this profitable gamble? Assuming the bet can be repeated many times, you shouldn't stake your entire bankroll on the first gamble, as, if you lose, you will be unable to gamble again. The Kelly criterion shows you which fraction of your net worth to bet on this gamble -- or any other profitable gamble -- so as to maximise your average end wealth.

William Poundstone describes the life of the Kelly formula by introducing us to some of its most famous users: Ed Thorp, who used it when counting cards at blackjack and in his early hedge fund; and Claude Shannon, who used it in his stock market speculation and who built a roulette wheel prediction device with Thorp. Poundstone also explains how the partners of Long-Term Capital Management (LTCM) would have done well to heed the formula's advice. He also covers the spirited academic debate behind the formula: including the links it shares with the work of Daniel Bernoulli, and Paul Samuelson's witty opposal to its overuse (there are many good reasons to bet less than the amount implied by the Kelly formula).

This is another five star book from William Poundstone.
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2 of 2 people found the following review helpful By James-philip Harries on 10 Mar. 2011
Format: Paperback Verified Purchase
William Poundstone, for my money, is the best science writer operating today. If you can bear Malcolm Gladwell, you'll appreciate the quality when you make the switch to Poundstone. And he rarely does that sketch portrait schtick about the bearded researcher in the Hawaian shirt at an untidy desk in a cramped office on a leafy campus either, thanks.
This book, I'm sorry to say, is not his best. In fact it's two books. One is about how to beat the system, by fair ways or mostly foul. Hence the crime stories. The second book is an examination of Efficient Market Theory. EFT is the notion that since all public information is already in the price, you can't beat the stock market.
You can see why the two stories overlap. But they are, or should be, separate.
Beating the stock market is, however, what some people routinely do. And anyone who has owned shares has already been baffled how share prices can ignore great events but yo-yo on trivialities. From Bachelier to Samuelson, EFT has ignored these obvious problems. But it's very difficult to confound EFT, because you have to design a scientific way of beating the market. The Kelly system got most of the way to being scientific. Ah, but science is replicable. And once there are more than a few Kelly betters in the market the scientific advantage disappears.
Many of the great names, from Bernoulli (utility) to Shannon (information) get name checks here, useful if you're going to interview with an investment bank. I'd give the book 4 stars if it was by anyone else, and I really don't quarrel with previous critics who've given it five. It's just that I have got used to having very high expectations of this author.
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1 of 1 people found the following review helpful By A. P. J. Jansen on 23 Jan. 2011
Format: Paperback
Fortune's Formula by William Poundstone can be said to be about the Kelly Criterion; a way to deal with uncertainty that gives the best return for your money without running the risk of bankruptcy, and which can be used in gambling and buying stock. But the book is much more. It is also about Daniel Bernoulli who knew about it more than 200 years ago. It is about Claude Shannon and his information theory. It is about Edward Thorpe and how he used the Kelly Criterion to make an awful lot of money. It is about mobster and dodgy investment funds. It is about blackjack, roulette, and horse racing. And it is about economists, their theories, and their feud with the people using the Kelly Criterion. All these topic are presented in an engaging and often even amusing style.

I would gladly have given five stars except for two things. First, there are simply too many topics, and it was not always clear to me what some of them had to do with the main subject of the book. For example, at various places in the book it is hinted that Shannon made a lot of money on Wall Street using some secret theory of his own. At the end it turns out that such a theory has never existed. Second, the mathematics is sometimes a bit sloppy. For example, when I tried to use Shannon's Rebalanced Portfolio I could not make money from a random walk as described in the book. It only worked when I assumed that the size of the fluctuations of a stock price was constant.
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40 of 46 people found the following review helpful By Rolf Dobelli TOP 500 REVIEWER on 6 Feb. 2006
Format: Hardcover
This is a fascinating book about the sociology of ideas and, specifically, about information theory. Author William Poundstone explores how Claude Shannon, the major developer of information theory, affected finance, investing and gambling. These activities seem disconnected, but they all rely on managing uncertainty. Like any great idea, information theory attracted major personalities: gamblers, mobsters, academics, economists, traders and people who just wanted to make money. The story weaves through a collection of memorable people (from seventeenth-century mathematicians to Ivan Boesky) to present pertinent mathematical and scientific theories, and to explore how people used them. At times, the connections between events seem strained, but they all come together. This book is encyclopedic, exceptionally informative, and packed with great stories and characters. We enthusiastically recommend it to anyone seriously interested in investing, the sociology of ideas, or gambling. Indeed, read it twice: once for its theories and practical investment advice, and the other to relish its personalities.
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