Founders
Episode 92 #92 Ed Thorp and Claude Shannon
Founders

Episode 92: #92 Ed Thorp and Claude Shannon

Founders

Episode 92

#92 Ed Thorp and Claude Shannon

David Senra is the host of Founders, where he studies history's greatest entrepreneurs. This is what he learned from reading Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.

What I learned from reading Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.

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Claude Shannon was as close to a sure thing as existed [2:53]

The beginning of information theory [7:11]

Project X [9:09]

introduction to Ed Thorpe [15:05]

using math and physics to beat Las Vegas [18:03]

Ed Thorp and Claude Shannon meet [20:45]

testing Thorpe’s Blackjack theory [26:00]

The core of John Kelly’s philosophy of risk can be stated without math. It is that even unlikely events must come to pass eventually. Therefore, anyone who accepts small risks of losing everything will lose everything, sooner or later. The ultimate compound return rate is acutely sensitive to fat tails. [28:23]

I’d be a bum in the street with a tin cup if the markets were efficient. —Warren Buffett [44:30]

how Claude Shannon begins studying the stock market [46:45]

Claude Shannon and Henry Singleton [48:16]

why and how Ed Thorp started investing in stocks [49:49]

Thorp starts a hedge fund and starts working remotely [52:49]

Ed Thorp meets Warren Buffett [54:20]

An acid test of Princeton/Newport’s market neutrality came in the Black Monday crash of October 19, 1987. The Dow Jones index lost 23 percent of its value in a single day. Princeton/Newport’s $ 600 million portfolio shed only about $ 2 million in the crash. Princeton Newport’s return for the year was an astonishing 34 percent. [59:36]

the implosion of Long Term Capital Management [1:07:00]

The thing you should do is the opposite of what you feel you should do. –Jim Clayton [1:09:10]

A quote from 1738: A man who risks his entire fortune acts like a simpleton, however great may be the possible gain. — Daniel Bernoulli [1:13:00]

Claude Shannon: A smart investor should understand where he has an edge and invest only in those opportunities. The methods Claude Shannon used to invest [1:17:10]

I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth

Be like Gareth. Buy a book: All the books featured on Founders Podcast

#92 Ed Thorp and Claude Shannon

Introduction

Much useful thought and data collection has supported the idea that neither securities markets nor betting systems prevent some ventures from gaining highly satisfactory way above average results through unusual skill. William Poundstone’s book Fortune's Formula collects much of the modern evidence on this point in a highly entertaining way. Moreover, the book contains an account of the Lollapalooza investment record of Claude Shannon, a pioneer scientist in information theory that make Shannon's methods look much like those of Charlie Munger.

Okay. So a few weeks ago when I was reading through Poor Charlie's Almanack, I came across that paragraph. Charlie Munger is one of the smartest people I've ever come across. So when he recommends reading a book, it's kind of a no-brainer to just order it immediately. So the full title of the book is Fortune's Formula: The Untold Story of the Scientific Betting System that beat the casinos and Wall Street, and it was written by William Poundstone. So for today, there's a lot of different characters in the book.

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