Last week I talked about the formula that Kelly had come up with which saw himself and his partner Shannon being able to execute the perfect bet size when they knew that they had an edge. Although not much documentation exists that they used the formula to bet on the horses it was a meeting with a gentleman called Edward Oakley Thorpe that made history.
Thorpe (who’s birthday it is today and he turns 82!) was a maths professor, author, hedge fund manager and more importantly to this story a blackjack player. In 1966 he published the well known book Beat The Dealer which sold over 700,000 copies in it’s first year of release. All of this came about however after Thorpe had read a paper published by Kelly called the Kelly Criterion which I wrote about last week.
In essence Thorpe invented card counting and in 1962 he proved his theory that one could beat the house edge by applying the counting of cards and with a bankroll that would be bet using Kelly’s formula. Thorpe received an investment from a Manny Kimmel who at the time was a wealthy professional gambler and although never really proved was connected with the mafia. Thorpe turned a $10,000 bankroll into a $11,000 profit in his first weekend. He could have won more but drew too much attention to his winning ways and was thrown out of many casino’s. A problem that probably fueled his desire to carry on!
So a new way of making money was born and Thorpe was becoming a bit of legend amongst the gambling world. News traveled fast of this new method of beating the house and Thorpe soon had to start wearing disguises to prevent detection within the casino’s. He was now good friends with Shannon who had previously worked with Kelly and they with their wives would often go to Nevada on “weekends” away where they would work as a team. Kelly and Shannon had previously also developed the first wearable computer so they could gain an edge in roulette with great success.
After around five years, it was rumored that Thorpe had used several of his students in disguise to take the casino’s for millions using his blackjack techniques. The film 21 was based on this and makes for a good watch. Having ran into to many problems with casino management Thorpe packed it all in and went into managing hedge funds where he applied the same theories as he did with his gambling and became extremely successful at that. In fact he has announced that he made a 20% increase in his wealth every year for 28 years. Nice!
So that concludes one of my favourite stories in the gambling world and how three guys, Kelly, Shannon and Thorpe beat the market and made a fortune from gambling. Of course these methods don’t work anymore as the casino’s have restored their edge and shuffle far too often for Thorpe’s method to work. It does though serve to teach us that there are ways to beat the bookie and by working hard we can profit from the colourful world of betting.
I’ll be back next week with more tales from the betting world but until then good luck and happy punting.