The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It Read Online Free PDF Page A

Roger Baldwin and three of his colleagues—James McDermott, Herbert Maisel, and Wilbert Cantey—who’d been working at the Aberdeen Proving Ground, a military facility in Maryland. Among blackjack aficionados, Baldwin’s group came to be known as the “Four Horsemen,” although no one in the group actually tested the strategy in Las Vegas. Over the course of eighteen months, the Four Horsemen punched a massive amount of data into desktop calculators, plotting the probabilities involved in thousands of different hands of blackjack.
    Ever the scientist, Thorp decided to give Baldwin’s strategy a whirl in Las Vegas. While the test proved inconclusive (he lost a grand total of $8.50), he remained convinced the strategy could be improved. He contacted Baldwin and requested the data behind the strategy. It arrived in the spring of 1959, just before Thorp moved from UCLA to the Massachusetts Institute of Technology.
    At MIT, Thorp found a hotbed of intellectual creativity that was quietly revolutionizing modern society. The job he stepped into, the coveted position of C. L. E. Moore Instructor, had previously been held by John Nash, the math prodigy who eventually won the Nobel Prize in economics in 1994 for his work on game theory, a mathematical approach to how people compete and cooperate. (Nash later became known as the subject of
A Beautiful Mind
, the book and movie about the competing forces of his genius and mental illness.)
    That first summer in Cambridge, Thorp crunched the numbers on blackjack, slowly evolving what would become a historic breakthroughin the game. He fed reams of unwieldy data into a computer, seeking hidden patterns that he could exploit for a profit. By the fall, he’d discovered the rudimentary elements of a blackjack system that could beat the dealer.
    Eager to publish his results, he decided on a prestigious industry journal,
The Proceedings of the National Academy of Sciences
. The trouble: the journal accepted papers only from members of the academy. So he sought out the only mathematics member of the academy at MIT, Dr. Claude Elwood Shannon, one of the most brilliant, and eccentric, minds on the planet.
    On a November afternoon in 1960, Ed Thorp walked briskly across MIT’s leaf-strewn campus. A cold wind whistled off the Charles River. The freshly minted mathematics professor shuddered, and his nerves jangled at the very thought of sitting down face-to-face with Claude Shannon.
    Few figures at MIT were more intimidating. Shannon was the brains behind two of the twentieth century’s greatest intellectual advances. The first was the application of the binary number system to electronic circuits, which laid the groundwork for the birth of the computer. Shannon’s great breakthrough had been to take a two-symbol logic in which problems are resolved by the manipulation of two numbers, 1 and 0, and apply it to a circuit in which a 1 is represented by a switch that is turned on and a 0 by a switch that is turned off. Sequences of on and off switches—essentially strings of 1s and 0s—could represent nearly any kind of information.
    Shannon was also a founding father of information theory: how to encode information and transmit it from point A to point B. Crucially, and controversially, Shannon asserted at the start that while messages “frequently have meaning … [such] semantic aspects of communication are irrelevant to the engineering problem.” In other words, information, as a technical matter, is completely devoid of meaning and context. Instead, it is purely statistical, and therefore encodable.
    This was highly counterintuitive. Most scientists prior to Shannonhad assumed that the fundamental element of communication was meaning, and nothing but meaning. Shannon changed all that.
    Thorp didn’t want to talk to Shannon about the binary code or information theory, however. He wanted to talk about blackjack. He was still on edge as he stepped into Shannon’s office. Shannon’s