Fortune's Formula

"It's said that it is one of the few times in history where somebody founded the field, asked all the right questions, and proved most of them and answered them all at once." Information theory's birth.

"It's said that it is one of the few times in history where somebody founded the field, asked all the right questions, and proved most of them and answered them all at once." Information theory's birth. Claude Shannon, working at Bell Labs in the 1940s, single-handedly invented information theory. This groundbreaking work laid the foundation for modern digital communication, computing, and data compression. Shannon's theory quantified information, introducing concepts like bits, entropy, and channel capacity. Beyond communication. Shannon's work extended beyond communication theory. He made significant contributions to cryptography during World War II, developed early chess-playing computers, and even dabbled in stock market analysis. His versatile genius and playful approach to problem-solving made him a legend in scientific circles.

"Gmax = R" Maximizing growth. John Kelly, inspired by Shannon's work, developed the Kelly criterion in 1956. This formula determines the optimal fraction of capital to bet or invest to maximize long-term growth rate. The key insight: bet size should be proportional to the edge (advantage) and inversely proportional to the odds. Applications in finance. The Kelly criterion found applications beyond gambling, particularly in financial markets. It provides a framework for risk management and portfolio optimization, balancing potential gains against the risk of ruin. Many successful investors and hedge funds have adopted variations of the Kelly strategy to guide their decisions.

"To help persuade you that this may not be luck, I estimate that...I have made $80 billion worth of purchases and sales ('action,' in casino language) for my investors." Beating the casino. Edward Thorp, a mathematics professor, applied probability theory to develop a winning strategy for blackjack. His book "Beat the Dealer" revolutionized casino gambling and card counting techniques. Wall Street success. Thorp translated his gambling insights into financial markets, founding the highly successful hedge fund Princeton-Newport Partners. He pioneered statistical arbitrage and other quantitative trading strategies, consistently beating market returns over decades. Thorp's career exemplifies the power of applying mathematical models to both gambling and investing.

"You'd have to be a fool not to know that he was talking about Michael Milken and Robert Freeman." EMH challenges. The Efficient Market Hypothesis (EMH) asserts that market prices fully reflect all available information, making it impossible to consistently beat the market. However, the success of investors like Thorp, Warren Buffett, and James Simons challenges this theory. Insider information. The 1980s Wall Street scandals, involving figures like Ivan Boesky and Michael Milken, highlighted how insider information could be exploited for massive profits. These events underscored the…