Ed Thorpe - Gambling, Kelly Criterion

03 Apr 2017 . Category: Investment

Just listened to this interview with Ed Thorpe, really fascinating guy. If you’re interested in Maths then its a must listen - more about gambling than trading.

He comes across as a very interesting guy as he talks about doing stuff that happens to interest him, more from an intellectual standpoint rather than being financially motivated. Along the way he made discoveries that were game changers in gambling / finance.

The talk starts about him making bombs as a kid, to eventually becoming a maths Professor. He went on holiday to Las Vegas and decided that he’d use it as an opportunity to observe / develop a system to try to beat casinos at blackjack. He also had the idea of beating roulette using his Physics/Maths knowledge. To cut a long storey short, he succeeded in both - inventing what is currently known as card counting. After coming up with the system, he went on to publish it (instead of using it to make lots of money)

He then decided that he’d give a go at trying to make money on the stock market after reading a pamphlet about warrants. He anticipated a way to price the warrants by removing risk and set out to develop a system. He wrote a book about his system and two academics who were aware of his book went on to develop a related system to price options (which became known as the Black-Scholes model, now the industry standard).

I found the closing discussion on Kelly criteria interesting, it refers to a way to size bets optimally to make most gain with least risk based on knowing your anticipated % advantage. Basically, if you bet big you may get wiped out but if you size your bets correctly, you can maximise the expected growth (compared to someone not using the Kelly criteron). He has a book about this and so I’ll probably investigate this further.

I’ve probably made it all sound pretty boring, but it was very good. Honest.


PS I’ve posted this mainly for my own future reference. Kelly Criterion coud be useful for practical purposes eg I take up poker or write a trading system :smile: It sounds like it could be quite complicated book, but that there is a rule of thumb can used and easily applied.


Iain Benson is a real person and not a grassy plant viking. He lives in Scotland. In his spare time, Iain likes tinkering with his Raspberry Pi, going for long walks and drinking wine. Preferably all at the same time.