Edward O. Thorp
Edward Oakley Thorp (born August 14, 1932) is an American mathematics professor, author, hedge fund manager, and blackjack researcher. He pioneered the modern applications of probability theory, including the harnessing of very small correlations for reliable financial gain.
Edward O. Thorp
August 14, 1932
Compact Linear Operators in Normed Spaces (1958)
Thorp is the author of Beat the Dealer, which mathematically proved that the house advantage in blackjack could be overcome by card counting.[1] He also developed and applied effective hedge fund techniques in the financial markets, and collaborated with Claude Shannon in creating the first wearable computer.[2]
Thorp received his Ph.D. in mathematics from the University of California, Los Angeles in 1958, and worked at the Massachusetts Institute of Technology (MIT) from 1959 to 1961. He was a professor of mathematics from 1961 to 1965 at New Mexico State University, and then joined the University of California, Irvine where he was a professor of mathematics from 1965 to 1977 and a professor of mathematics and finance from 1977 to 1982.[3]
Background[edit]
Thorp was born in Chicago, but moved to southern California in his childhood. He had an early aptitude for science, and often tinkered with experiments of his own creation. He was one of the youngest amateur radio operators when he was certified at age 12. Thorp went on to win scholarships by doing well in chemistry and physics competitions (one instance led him to meeting President Truman), ultimately electing to go to UC Berkeley for his undergraduate degree. However, he transferred to UCLA after one year, majoring in physics. This was eventually followed by a PhD in Mathematics at UCLA. He met his future wife Vivian during his first year at UCLA. They married in January 1956.
Stock market[edit]
Since the late 1960s, Thorp has used his knowledge of probability and statistics in the stock market by discovering and exploiting a number of pricing anomalies in the securities markets and has made a significant fortune.[5] Thorp's first hedge fund was Princeton/Newport Partners from 1969 to 1989 based on Market Neutral Derivatives Hedging. His second hedge fund was called Ridgeline Partners and it ran from August 1994 through September 2002 based on statistical arbitrage.[13] This hedge fund was closed largely because the return of the statistical arbitrage strategies had been low since 2002. He is currently the President of Edward O. Thorp & Associates, based in Newport Beach, California. In May 1998, Thorp reported that his personal investments yielded an annualized 20 percent rate of return averaged over 28.5 years.[17]
Ed Thorp wrote many articles about option pricing, Kelly criterion, statistical arbitrage strategies (6-parts series),[18] and inefficient markets.[19]
In 1991, Thorp was an early skeptic of Bernie Madoff's supposedly stellar investing returns which were proved to be fraudulent in 2008.[20]