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

Beating the Dealer 
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lower than that of the Yankees (or any other team) winning half their 
games. this connection between the probability of a message and the 
information contained in the message provides the crucial link needed 
to quantify information. In other words, by connecting information 
with probability, Shannon discovered a way to assign a number to a 
message that measures the amount of information it contains, which 
in turn was the first major step in building a mathematical theory of 
information.
the invention of information theory turned Shannon into an over-
night sensation, at least in the worlds of electrical engineering, math-
ematics, and physics. the applications proved to be endless. He stayed 
at Bell Labs for another decade after the war, before he moved to MIt 
in 1956.
thorp arrived in Massachusetts in 1959, just a year out of graduate 
school. By then, Shannon held an endowed chair, with dual appoint-
ments in the mathematics and electrical engineering departments. His 
most important work had already been published and its influence 
was spreading rapidly. By the late 1950s, he was an academic rock star. 
Already famously eccentric, Shannon was now powerful enough to 
dictate his own terms to MIt: whom he would meet with, what he 
would teach, how much time would be devoted to research. He was 
not the kind of man whose office you would casually stick your head 
into — especially if you were just a lowly instructor. to meet Shan-
non, thorp needed an appointment. And to get an appointment, he 
needed something worth talking about; as Shannon’s secretary would 
later inform thorp, Professor Shannon didn’t “spend time on topics 
(or people) that didn’t interest him.”
fortunately, thorp had a topic that would entice Shannon. A few 
months before moving to Massachusetts, the thorps had visited Las 
vegas for the first time. they chose vegas because they expected it to 
be a bargain: close to Los Angeles, plenty of inexpensive hotels, a lot 
to see and do. Plus, thorp thought, he’d have a chance to scope out 
professional-level roulette wheels. But as it turned out, roulette wasn’t 
thorp’s principal interest on this trip. Shortly before the young couple 
left for their vacation, a colleague passed along a recent academic ar-

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ticle from the Journal of the American Statistical Association. It con-
cerned the game of blackjack, or twenty-one.
As far as casino games go, blackjack is old — older, even, than rou-
lette. cervantes, the author of Don Quixote, used to play a variation in 
Spain in the early seventeenth century and wrote stories in which his 
characters became proficient at cheating. the game is typically played 
with one or more standard decks of cards. You start by placing your 
bet. the game begins with each player (including the dealer) being 
dealt two cards, and then players have a chance to ask for additional 
cards until they decide they’ve had enough or they “bust,” which hap-
pens if their cards sum to more than twenty-one points. number cards 
are worth their face value; face cards are worth ten points; and an ace 
can be worth either one point or eleven points, at the player’s discre-
tion. the goal is to have the highest number of points without going 
over twenty-one. At a casino, each player is competing individually 
against the dealer, who represents the house. the goal, then, is to beat 
the dealer without busting. If you win, the game pays a dollar for every 
dollar you bet unless your initial two cards add up to twenty-one. In 
that case, the game pays a $1.50-per-dollar bet.
casinos always employ the same strategy. the dealer has to take a 
new card as long as his total number of points is less than seventeen. 
If it’s seventeen or more, the dealer stops. And if the dealer busts, ev-
eryone wins. the twist, at least in a casino, is that although the players’ 
cards are all dealt face up, one of the dealer’s cards is dealt face down, 
so the players do not get to see it until the end of the game. not know-
ing what you’re up against makes it more difficult to know when to 
stop asking for new cards.
casinos have run blackjack tables for a long time. And they’ve made 
money doing it. this suggests, but doesn’t quite prove, that the odds 
are with the house. the reason it doesn’t quite prove it is that black-
jack, unlike roulette, is a strategy game. the player has a choice to 
make: When do you ask for additional cards? even by the early 1950s, 
as gambling took hold in vegas, no one knew if there was a strategy 
that a player could adopt that would give him an advantage over the 
house. All anyone knew for sure was that whatever most people were 
doing, it was good for the house. figuring out more than that would 
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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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