Ed Thorp's autobiography proves he's 'A Man for All Markets'
15 Jun 2017
By Clare Fitzgerald
By Clare Fitzgerald
While the title is long, the book itself is not overly so, running around 350 pages, plus some appendices full of charts about financial data. There is also a foreword by the risk analyst Nassim Taleb, who takes a few paragraphs to praise Thorp's writing and his character before diving into a discussion of the failings of academic finance as a field, which perhaps should be expected given that Taleb is one of the more curmudgeonly finance writers in the public sphere today.
Thorp, on the other hand, is the polar opposite of curmudgeonly, which is a blessing to the reader because otherwise this story of an exceptionally smart guy cruising through the 20th century casually wrecking everything he touches with math would be a bit much to take. After all, there are really only three ways to talk about how smart you are — bragging, humblebragging and false modesty — and they're all insufferable. Thorp mostly gets around this by writing in a simple, direct style with touches of extremely dry humor, with the result that he comes off as the most even-keeled guy in the world.
Thorp doesn't waste time acting literary and starts his story at the very beginning, with the first sentence in Chapter 1 recalling his first memory, and proceeding through his life in a perfectly linear fashion.
The earlier chapters paint a picture of an inquisitive, gifted kid focused on learning whatever he can learn, however he can learn it. Though they zoom through the first 20 years of so of Thorp's life pretty quickly — the faster to get to the fun gambling stuff — they provide a vibrant glimpse into a mid-20th-century America that young 'uns like myself are mostly familiar with from sepia-toned pictures in history books. Thorp describes a young childhood shaped by the Great Depression and his years as a "war orphan" during the mass mobilization of World War II. Young Thorp also displays a lefty streak that I admit I do not stereotypically associate with Wall Street investors, organizing a strike of newspaper boys as an 11-year-old and launching a working-class takeover of the student government in his high school. But most of his childhood seems to involve reading and doing the sorts of chemically volatile science experiments that have since become off-limits to children for safety reasons.
But the real reason I (and probably most Casino City readers) wanted to read this book is the blackjack stuff. Only about a hundred pages of the book is dedicated to the time between Thorp's entry into the UC system as a scholarship student and his turn toward investing as a professor at New Mexico State. Having survived almost getting expelled for smartassitude toward a teacher — something that could have been a death sentence, as the Korean War was on and the draft active — Thorp studies physics and mathematics, meets his future wife, and goes on vacation to Las Vegas, where he becomes fascinated with the mathematics of gambling. His first obsession on this front is trying to figure out how to predict the results of roulette, a project he works on largely as a just-for-fun distraction from finishing his mathematics Ph.D. because that's just the kind of nerd he is. It's while trying to surreptitiously study real casino wheels in Vegas that Thorp gets hooked on blackjack, and decides he's going to figure out how to beat it.
Thorp starts really trying to crunch the numbers for blackjack in spring 1959, and crunching numbers for complex calculations in 1959 was a whole different beast than it is here in 2017. Thorp describes working his way through boxes of papers full of complex calculations done on desk calculators, and describes trying to figure out ways to streamline the math so that he doesn't have to do "four hundred million man-years of calculations" (p. 69) and develop millions of strategy tables. Fortunately for Thorp, in 1959 he also accepted a teaching position at MIT in Cambridge, Massachusetts, so he had early access to a computer. (That he had to teach himself FORTRAN to be able to use it gets one offhand sentence, because Ed Thorp is smarter than you and me.)
Once the mathy bits are worked out, Thorp has to test out his new card-counting system by going to casinos and using it, and the quiet academic's life gets very interesting for a bit. In addition to getting a lot of academic attention, Thorp attracts attention from the Boston Globe, then the Washington Post (who are kind of rude about it), then from a bunch of cranks, and finally from a pair of shady-seeming New York multimillionaires who bankroll him for several high-stakes blackjack games in Vegas.
This section of the book has it all: Big money, playing cat-and-mouse with the casinos, speaking in code, businessmen who turn out to be gangsters, and some terrible midcentury clothing choices, going by the photos in the middle of the book. (Thorp's 1964 glasses have returned to being quite fashionable, though.) After the publication of Beat the Dealer, things escalate further, with card counters getting beaten and jailed, Thorp getting framed for cheating by an agent of the Nevada Gaming Control Board, and all those shenanigans that make reading about '60s and '70s Las Vegas so much fun. Thorp and his nerd friends at MIT branch out into baccarat and finally create a wearable computer for beating roulette, with surprisingly good results.
It's a bit disappointing, then, when Thorp decides to start investing his blackjack winnings and book royalties and turns to Wall Street, and I say this as someone who loves Wall Street stories nearly as much as I like gambling ones. But one can hardly blame Thorp for quitting the blackjack life, since he seems to have been the target of at least one assassination attempt.
It's in the Wall Street section where Thorp branches out a bit from pure autobiography and starts giving out investment advice and political opinions, although whether this is to make up for the lack of mobsters and assassination attempts in this section or to distance himself from Wall Street's reputation in our current political moment is anyone's guess. This section also has a lot more math for the reader to follow than the earlier parts of the book had. It is in the depths of the financial swamp that Thorp's tendency toward spare, readable prose is a lifesaver for math-challenged readers like myself; he doesn't quite have Michael Lewis' gift for making complex financial concepts accessible to lay readers, but in my experience, 99% of academic and mathematical types are completely unreadable to laypeople, so at least that bar has been cleared.
Thorp, academic and child of the Great Depression, is contemptuous of much of Wall Street's behavior, genteelly deploring all the crooks, users and cheats the industry seems to attract. Many of the anecdotes themselves are quite juicy, such as his decision to take a pass on investing with Bernie Madoff way back in 1991, but all put together they paint a picture of a guy staying squeaky clean and only investing prudently and ethically for several decades, never getting his hands dirty in any of the dozens of major scandals that went down in the industry, never falling for the traps that caused any of the major financial meltdowns from the 1970s onward, taking only modest losses in even the worst crashes and hanging out only with highly philanthropic, politically respectable rich folks with stellar reputations, such as Warren Buffett. It may all quite well be true, but one suspects that if it's only mostly true, the author has a clear interest in making the author look good.
Woven in among the discussion of Thorp's Wall Street career specifically are lessons and thought experiments on finance generally, including a rather useful wealth classification table and wealth calculator that illuminates that one may be in a different class based on whether one measures using wealth or income (I found this out because I did the math and my wealth and income put me in two different classes), and a system for estimating one's net worth (don't ask). However, Thorp ruins a perfectly good discussion on income inequality with some non-investing-related budgeting advice for plebs.
This, on p. 269, is the low point of the book by miles. For most of the book I am willing to believe that Thorp is older, wise, more accomplished, and a hell of a lot smarter than I am, so I am fine with the one-way exchange of information that occurs with the book format as opposed to having a conversation. There is one area of human experience, however, where I am a lot more knowledgeable than Thorp, and that is being a working pleb in the post-crash years.
Thorp's advice, to put it plainly, simply reeks of his having been a millionaire since the 1970s. One bit of advice is to give up smoking. Only 22% of the millennial demographic smokes; in the '50s and '60s, when Thorp was a young adult, somewhere around 60% of men and 40% of women did. His calculations also assume a floor of "no savings and no prospects" as the lowest starting point a young worker can have; the average college graduate of the class of 2016 entered the workforce with $37,172 in debt. Another bit of advice is to give up drinking two $5 six-packs of beer a day, as if someone drinking two $5 six-packs of beer a day doesn't have bigger problems than an insufficiently diversified investment portfolio — like raging alcoholism and terrible taste in beer, for starters. About the only thing to be said for Thorp's advice for people like me is that at least he didn't mention lattes or avocado toast.
By page 290, however, Thorp was back in my good graces, with a series of disdainful comments about the Efficient Market Hypothesis and some digs at all the very smart people who relied on it to pretend they'd beaten Keynesian economics and ended business cycles forever, or whatever it was they claimed between economic crashes. Thorp's suggested remedies for repeated economic implosion are hardly radical — unsurprisingly, he doesn't advocate that the working classes seize the means of production and overthrow the bourgeoisie, although it would be hilarious if he did — consisting largely of the things other mainstream liberal economic writers have been suggesting for several years now, such as reining in excessive leverage, better regulating derivatives and breaking up "too big to fail" institutions. He ends the book with a brief, polite diatribe on the "politically connected rich."
One suggestion Thorp makes that I have not heard before is to give shareholders power over executive compensation, rather than imposing salary caps via governmental regulation. Currently, most corporate decisions for public companies, including director and executive pay, is set by the board of directors. Many companies also have different "values" of shares for directors and for members of the public who invest, making issues that shareholders are supposed to get a say in less democratic. While the percentage of Americans who hold shares in public companies is at a record low, at around half, it's still enough people that it could, in theory, make a big difference in the centers of power in a company. Thorp doesn't go into much detail about how this would work, though. I have questions about if this plan includes those of us whose investments are mostly in the form of 401(k)s and other things where we might not really know what companies we're invested in, or have little spare time to research and vote on business matters even if we did. (I also find it politically interesting that when Thorp posits a more democratically run company, he thinks of shareholders rather than workers, although since Thorp is a shareholder and I am a worker, I suppose it's not surprising.)
If you're at least passably interesting in all the different subjects Thorp covers — blackjack and science experiments and financial fraud and the politics of economics and early computers — then this book should be right up your alley. It's a good-natured, accessible look into some chaotic and inaccessible fields, plus you get some free investment advice.