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12 July 2018 Financial Analysts Journal Book Review

A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (a review)

  1. Mark S. Rzepczynski
A Man for All Markets is the autobiography of a man regarded by many as the father of quantitative finance. His story is one of a mathematician who moved from solving such casino games as blackjack to applying his skills to option pricing and statistical arbitrage. As he recounts his journey, he provides insights for all money managers on how to generate an edge and beat the markets through deep research.

Ed Thorp is not well known among money managers, but he is held in awe by traders as a polymath, successful card counter, mathematician, finance specialist, and hedge fund manager. He could be considered a Warren Buffett of quant traders. Thorp is a model of someone who theorizes how markets and games operate, tests his ideas through evidence and hard work, and then puts his “skin in the game” by playing with real cash.

The relevance of the autobiography may not be immediately apparent to finance-oriented readers, but this unassuming trading wizard champions a combination of basic scientific thinking, problem solving, and dogged determination as his means of finding answers to tough questions. The results are not the ordinary research musings of finance academics. Thorp began his career as an academic mathematician, but his story is one man’s search for an edge at playing games modeled through probabilities. The edge he found in games of chance led to valuable discoveries in finance, successful businesses, wealth, and fame.

Thorp’s early focus on the nuances of blackjack card counting may not be of great interest to money managers, but he provides enough details on his research process and trade testing to keep readers engaged. From blackjack and roulette, where he helped develop the first wearable computer, Thorp moved on to the “big casino”—that is, Wall Street. To him, it was just another puzzle to be solved. Professional investors can learn much from Thorp’s application of his gambling-based methods of solving problems, measuring probabilities, and formulating choices to stock and options trading.

Thorp’s early success in devising mathematical systems for beating the house, such as card counting, put him at an advantage in finance. He understood the need to either create an edge or walk away from the table. His efforts to find an edge in finance led to the development of pricing models for trading options, convertibles, and warrants before the published academic literature of Black–Scholes–Merton. Thorp’s goal was not to be published but to beat the market. He next trained his skills on solving problems in statistical arbitrage as well as finding arbitrage opportunities across the capital structure and through relative mispricing. For example, he tells an intriguing tale of how he was able to identify arbitrage opportunities in mutual savings bank conversions.

Being the first with a system and an edge, Thorp was able to create a hedge fund that produced returns any manager would envy. For those who think the path to investment riches is paved with brilliance, Thorp reveals the reality of successful research: It entails endless curiosity about tough questions and dogged determination.

The last quarter of the book focuses on Thorp’s views regarding modern finance and investing. It conveys substantial wisdom from someone who has “played the game.” From market efficiency to compound growth to asset allocation to financial crashes, Thorp offers clearly reasoned opinions that will help the reader think through the nuances of these broad topics. He also holds strong views on how to size risk effectively via a Kelly criterion—a core concept for traders, if not necessarily for money managers.

The book would provide even greater value for finance-oriented readers if it focused more on the “card counting” of finance and the identification of new trading opportunities. I would have enjoyed reading more about Thorp’s development of options pricing and arbitrage in the early days of options trading. Thorp is forthcoming about the more difficult periods of his career, such as the closing of his firm in the late 1980s. He also discusses how, when asked to evaluate Bernie Madoff in the early 1990s, he detected fraud simply by doing his homework and studying the evidence.

Thorp makes it clear that achieving an edge is not easy and should not be attempted by most investors. He provides sound advice in recommending that if one cannot find either an edge or a manager who has one, then it is best to hold a diversified, passive portfolio. In such circumstances, he advocates holding Berkshire Hathaway and index funds. Interestingly, Buffett and Thorp have crossed paths. They have a strong mutual respect but different views on how to make money—that is, value investing versus relative value.

This autobiography is an enlightening story of someone who ought to be better known in investment circles. It is an engaging and human story of how one quant researcher does his work and sees the world. His principles for successful money management are universal:

  • Take nothing for granted.

  • Withhold judgment until you review the evidence.

  • Find a problem, form a theory, test your idea, and apply the results with skin in the game.

This formula promises a life of hard work, but judgment based on evidence is the best road map for anyone practicing finance.

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