January 12th, 2021

Meet Me at the Blackjack Table

Fortune's Formula Pt. 2: Thorp put his blackjack system to the test.

This is the 2nd post in our 4-part series on Edward Thorp, a man who changed the games of blackjack and investing. Looking to catch up on the series? Check out the 1st post here.

In January 1961, the American Mathematical Society held its winter meeting in Washington. Thorp was there to present a version of the paper Shannon submitted to the National Academy. Since this paper wasn’t for the National Academy, Thorp titled it "Fortune's Formula: A Winning Strategy for Blackjack".

That title caught the eye of an AP reporter in Washington with whom Thorp did an impromptu interview and photo session. On the morning of January 21st, a feature appeared on the front page of The Boston Globe and in papers nationwide.

After those features were published, Thorp began to receive thousands of letters and calls asking to buy Thorp's blackjack system, take private lessons, or finance Thorp in the casinos for a share of the profit.

So what was in this paper that was so powerful?

Thorp's original paper on blackjack was mainly about the Kelly Criterion.

In probability theory, the Kelly Criterion is a method of betting for blackjack players who have a mathematical edge in a wager. The Kelly Criterion maximizes your profit while eliminating your risk of ruin and is a model for long-term growth rate. Remember, it doesn’t predict automatic short-term success or guarantee profit.

The strategy is most often used by card counters. The better a player's chances of winning based on the card count, the more the player bets. The size of this bet is determined according to the Kelly Criterion, sometimes known as the Kelly Formula. If the house has an edge in a game, then the Kelly Criterion is useless.

Thorp thought it would be fun to try the blackjack system out in a real casino. He and Shannon decided that the best offer was the biggest one. A group of two wealthy New Yorkers was offering $100,000 to take on the Nevada casinos. Thorp dialed the number on the letter and asked to speak to Emmanuel Kimmel, a wealthy professional gambler and former bookmaker.

Kimmel and his backer, Eddie Hand, met with Thorp every Wednesday to test out his playing skills. Several Wednesdays later, Thorp and Kimmel wanted to test the strategy at local blackjack tables in Reno and Lake Tahoe. Thorp was uncomfortable with Kimmel’s initial offer and insisted that $10,000 was enough to test the system.

As they hopped from one place to another, casinos eventually found out what they were doing, and they were no longer welcomed. This terminated the experiment. By Thorp's estimation, they had turned $10,000 into $21,000 in about 30 person-hours of play.

In Spring 1961, a book salesman visited MIT. Thorp found himself describing his blackjack system as a possible book, which led him to publish Beat the Dealer in 1962. It quickly became the bible for blackjack, and Thorp is still recognized as the father of card counting in blackjack.

Card counting in blackjack is used to determine when the player has an advantage over the house. This is done by tracking the ratio of high cards to low cards, with more high cards being the desired outcome. Since the objective of blackjack is to get as close as possible to 21, more high cards in the deck means a greater chance of the dealer busting or the player getting a natural.

However, many of Thorp’s strategies for counting cards no longer work, as casinos took steps to counter them.

It might seem like it was all fun and games up until this point of the story, but Thorp and Shannon’s financial success only grew exponentially. Keep up with the series to see how these legends take their tricks from the blackjack tables to the markets! Blackjack
TagsblackjackGamblinginvesting strategiescard countingedward thorpClaude Shannonkelly criterion