Fortune's Formula
This book is about Kelly's criterion developed in 1956 by two scientists (John Kelly Jr. and Claude Shannon) at Bell Labs for the transmission of information over copper wires but who immediately realized its application to gaming and investing. Many more professional gamblers used the formula than investors. One investor Edward Thorpe used it both to beat the casino's and as a hedge fund manager to beat the market. THE FORMULA does not tell one how to find edge but once one does the formula indicates how much one should bet to maximize the creation of wealth. Be warned that the use of a full Kelly will result in much volatility in the size of one's trading account. Many use a 1/2 Kelly which decrease volatility by 90% but decreases the size of the account after a 1000 trades by only 25%.
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What Hacker News says
- I recently went through two books: (1) Fortune's Formula and (2) A Man for All Markets. They both impressed upon me a deep appreciation for Shannon's brilliant mind.
Curious if there are any great resources/books you'd recommend on Information Theory.
- I recommend Fortune’s Formula, a book about the Kelly criterion by William Poundstone.
The book's blurb claims it "... traces how the Kelly formula sparked controversy even as it made fortunes at race tracks, casinos, and trading desks. It reveals the dark side of this alluring scheme, which is founded on exploiting an insider’s edge."
The book is light on math and strong on stories about and interviews with people using the Kelly criterion.
- William Poundstone, Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
Scott Patterson, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
- No rational style novel but Fortune's Formula was a good non-technical narrative intro to one aspect of this.
- I highly recommend the book "Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street"
- Fortune's Formula by William Poundstone is a fun read on the origin of the Kelly criterion, as well as the role of gangsters and bookies in the funding of the early communications infrastructure in the US.
