#60: Beating The House

Ever since he was little, Ed Thorp had a natural curiosity. Born in 1932 during the Great Depression, his parents worked long hours, leaving Ed to mostly entertain himself. 

He was always thinking up various risky shenanigans to try. At 8-years-old he bought several large balloons, with the aim of flying. He had second thoughts, however, when his gas-filled test balloon was shot out of the sky by an armed forces plane!

Two years later he obtained chemicals from a local pharmacy and started making explosives - even experimenting with the "big one" nitro-glycerine, until he badly burnt his hand! He explains,

'I formed a habit of thinking and testing things for myself.' 

Unsurprisingly, Ed loved science and saw it as his opportunity to afford college and build a career full of experimenting. Despite attending an unprivileged school, he won a California-wide Physics competition, received his scholarship and was even invited to meet the president, Harry S. Truman.

After graduating in Chemistry and Physics he became a maths professor, teaching at the world renowned M.I.T. He was always thinking through problems and after a Las Vegas trip, despite everyone telling him that the house always wins, he decided to check for himself, whether casino games were beatable. 

At M.I.T. there was an early IBM computer and Ed taught himself code and ran the complicated mathematical computations to decipher the game of blackjack.

In blackjack you receive two cards initially and then draw cards with the aim of getting close to a total of 21, without going over. Ed showed that when the card deck was rich in high numbers, the advantage stood with the player. He published his research, wrote a bestselling book 'Beat the Dealer' and took his card counting skills to Las Vegas. 

Here he won $100,000s, had his drinks spiked and even survived his car brakes being tampered with. Thorp's work revolutionised the game and another M.I.T. team replicated the strategy in the 90s, winning millions and inspiring the film '21'.

Ed then conspired with Claude Shannon, another maths genius, to beat the game of roulette.

They built the world's first wearable computer, which was amazingly operated by a toe clicker inside their shoes, which linked to an earpiece. This gave them a 44% edge over the casino!

Ed then wondered if he could beat the greatest casino on earth - Wall Street. His inquisitive mind quickly found inefficiencies in derivative pricing, and he started to capitalise. It wasn't long before he was managing money and he set up the world's first quantitative hedge fund. For over two decades he made on average 20% a year, with practically no risk - he never had a losing year!

Ed didn't keep on accruing money for the sake of it. Today he is a spritely 92-year-old with a strong interest in longevity. He works out every day, eats well and looks twenty years younger than his age. He truly is as his biography says a 'Man for all Markets'. 

WISDOM 💎

"Just because a lot of people say something is true, that doesn't carry any particular weight with me.'

Ed Thorp

Tip 1 - A SMART PLAY ✅

Bet big when you have an edge, but not too big that you risk going broke. 

Tip 2 - AVOID 🚩

The trap of wealth. According to Ed, as the richest guy in the world J.P. Getty was unfulfilled and was actually happier when he was a 16-year-old surfer. Ed loved to beat games and made plenty of money, but he concentrated on the important things. He was married for 55 years, loves spending time with his three kids and prioritises health, life experiences and friendships.

Tip 3 - ACTION 💪

Beating the house, starts off with curiosity. Ask questions about your industry and go and find for yourself if you can improve things. You might surprise yourself and have fun too!