The Physics of Wall Street: a brief History of Predicting the Unpredictable

Beating the Dealer 
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access to the key, since the randomness of the key will wash out any 
patterns in the original message.
A one-time pad such as I just described can be tricky in practice be-
cause the sender and the receiver have to have the same random keys. 
But in principle, the idea is simple. It gets more complicated when you 
try to implement the idea of a one-time pad for a telephone conversa-
tion. now there are no letters to add a number to or subtract a number 
from. there are sounds, and what’s more, the sounds are transmitted 
over long distances by a wire (or at least they were in 1944), which 
means that anyone who can gain access to the wire, at any point be-
tween the generals in the field and their home base, can listen in on the 
conversation.
the Bell Labs team realized that the essence of the one-time pad 
was the fact that patterns in the “signal,” the message being transmit-
ted, get lost amid the randomness of the “noise” — the key consisting 
of random numbers. So you need to take whatever medium is being 
used to carry the message (in this case sound) and add something to 
it that’s totally random so that you can’t make out any of the message-
bearing patterns. In a telephone conversation, the word noise isn’t a 
metaphor. Imagine trying to talk to someone with a loud vacuum 
cleaner running in the background. You wouldn’t be able to make out 
much, if anything, of what the person was trying to say. this is the 
principle behind SIGSALY, the system that Shannon and his collabo-
rators invented. If you add enough noise to whatever your general is 
saying, you can make it incomprehensible. Meanwhile, if you have ac-
cess to a recording of the exact same random noise on the other side 
of the message, back in Washington, you can “subtract” it from the 
coded message to recover the original voice. Implementing the system 
was an engineering marvel: signal processing of the sort necessary to 
remove noise from a telephone line, even if you knew exactly what the 
noise sounded like, was only at its earliest stages. But Shannon and his 
team figured out how to make it work. SIGSALY devices were built at 
the Pentagon for roosevelt, in Guam for MacArthur, in north Africa 
for Montgomery, and in the basement of Selfridges department store 
in London for churchill.
thinking about the relationship between a signal and noise led 

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Shannon to his most important insight—the basic idea underlying all 
of information theory and, by extension, the information revolution. 
Suppose you’re driving on the highway, having a conversation with 
the person in the passenger seat. You’re chatting away, and then an 
eighteen-wheeler passes by, and for a moment your passenger can hear 
only every other word you say because the truck is so loud. Will the 
passenger figure out what you were trying to say? It depends. Maybe 
you’ve just gotten started on your regular rant about traffic in Los An-
geles. You complain about it constantly, so your friend knows the riff 
by heart. Just a few words — maybe “construction” or “bad drivers,” 
plus an obscenity or two — would be enough to transmit the full force 
of your views on traffic. In fact, the passenger could be a complete 
stranger; no one likes traffic, and so a keyword here or there would be 
sufficient to get your message across. But what if you were trying to 
explain the details of a new film you just saw? then every word could 
be important. Your passenger would have little idea what to make of it 
if all he could hear was, “the lead — was — in the green — .”
Shannon concluded that the amount of information carried by a 
signal has something to do with how easy it is for the receiver to de-
code, or in other words, on how unpredictable the signal is. Your rant 
on traffic doesn’t contain much information — it’s easy to predict; your 
film synopsis contains more. this is the essence of Shannon’s informa-
tion theory.
Perhaps the easiest way to see why this way of looking at information 
makes sense is to turn Shannon’s picture around. Information is the 
kind of thing that takes you from feeling not so sure about something 
to feeling more sure about it. If you gain information, you learn some-
thing about the world. now imagine two cases. Suppose you begin by 
thinking that the Yankees have a great chance of winning half their 
games in any given year, but that there’s very little chance that there 
are aliens living on the moon. Shannon’s essential insight could be put 
as follows: if you were to learn, as in become absolutely certain, that 
there are aliens living on the moon, you would have gained a lot more 
information than if you were to learn that the Yankees have won more 
than half their games this year. the reason? In Shannon’s terms, it’s 
that the probability of there being aliens on the moon is much, much 
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t h e p h y s i c s o f wa l l s t r e e t

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