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on 10 March 2011
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.
Try Against the Gods: The Remarkable Story of Risk or A Random Walk Down Wall Street: A Time-Tested Strategy for Successful Investing instead or - alright - as well on this subject. And anything else by Poundstone if you have any curiosity about anything.
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on 23 January 2011
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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on 6 February 2006
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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on 15 May 2011
Other reviewers have remarked on how entertaining this book is; those who have read some of Poundstone's other works will find this no surprise. There are some wonderful anecdotes and insights here, with hard-ish science mixed in nice pen-portraits of the main protagonists.

However, having an interest in sports betting and investment, I also found the book very helpful in explaining the benefits and potential pitfalls of the Kelly approach (as Poundstone mentions, there is still antipathy towards the approach among some gambling experts who really should know better). In particular, he takes pains to explain why Kelly succeeds over both level staking and Martingale systems, and how volatility can be controlled through reduction in Kelly proportions and also diversification. I have benefited personally for these and other insights in the book, which I can thoroughly recommend.
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on 15 November 2009
I picked up this book because Mohnish Pabrai, the author of The Dhandho Investor, recommended it. The author describes the Kelly Formula that was developed by John Kelly at Bell Labs in New Jersey and applied by the individuals featured in the book. The formula calculates the optimal fraction of one's bankroll to bet on a favorable bet.

Edge/Odds = Fraction of one's bankroll to bet each time

For example, if you have a 50% chance of winning $100, and 50% chance of losing $50, how much do you bet? According to the formula, your edge = (50% x $100) + (50% x - $50) = $25. The odds are what you win, which in this case is $100. So the Kelly Formula is $25/$100 = 25%. This means that under this scenario, you bet 25% of your bankroll.

This is an interesting book and I recommend it to other readers.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market
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on 3 November 2014
Disappointing, given the mostly positive reviews. The thesis is that the Kelly formula for calculating what proportion of a gamblers bankroll (or investment fund) to risk on a given bet (or trade) is the 'scientific betting system that beat the casinos and Wall Street'. It isn't and the author fails to make any case that it is. My key criticism, though, is the lack of a cohesive narrative. The author presents a 300 page story that covers mobsters, information theory, Wall Street deception and academic in-fighting, in the midst of which Kelly is covered in half dozen pages. Much of the material is, at best, only weakly related to the main theme. Although much of the biographical coverage (Shannon, Thorp, The MIT portfolio theory guys) was interesting, overall this is a disjointed read. If you have never met ideas like the Efficient Market Hypothesis or Kelly or Information Theory, you may feel somewhat enlightened (and entertained) by the end of the tale but for the more informed reader this book really hasn't got a lot to offer. As an introduction to these concepts this book leaves much to be desired - at times I wondered whether the author really understood what he was writing about.
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on 10 December 2010
This book manages to educate, entertain and inform in several different ways. We have the stereotypically eccentric academics taking on the casinos and the markets and winning. We have some great anecdotes and history of everything from finance theory and derivatives markets to information theory and betting strategies.
Very little to fault. If I could give 4.5/5 I would.

S Gleadall - author of The Metaphysics of Markets
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on 16 August 2015
This book feels like it is written by a very enthusiastic lecturer giving a series of public lectures. As a result, some of the discussion on the mathematics used is quite light but the book is highly enjoyable as it is part biography, part mathematics, part history of gambling. Personally, if I had been the editor then parts of the mob story would have been cut and bit more on Kelly and Shannon and with some of the maths beefed up but even if this was the case you would still need to dip into a book on information theory so maybe the editor and author know more than me (and judging by the five star reviews they do!).
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on 16 November 2013
Anyone interested in investments, from betting on horses to Casinos to Stock Markets this gives a history of the principles. Explaining the odds and theories still applied today by the most sophisticated Wall Street Quants.
Not a dry lecture with misleading equations that no one understands but a readable history that explains how you should invest. No one knows what the stock markets will do next but you can have an edge if you take a systematic approach.
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on 15 September 2011
this book gives the best explaination on kelly formula - fact. apart from that it's a in depth story on investment theory and card counting in vegas to name a few wonders of this book... i give this book 5 stars because the explanation of kelly formula wont send you to sleep, and the rest of the book is well written and insightful. i feel that it's easy to learn something from this book while being a good read...
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