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

From Coastlines to Cotton Prices 
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fellow, which gave him considerable freedom to identify and develop 
his own projects, much like an academic researcher.
Gradually, as his ideas percolated through the many different scien-
tific disciplines, Mandelbrot began to receive some recognition for his 
work. the book that introduced the term fractals to the wider world 
went through several revisions beginning in 1975 and culminated in 
The Fractal Geometry of Nature in 1982. It was a cult sensation, and 
it turned Mandelbrot into a semi-public figure. By the early 1990s, he 
had collected a long list of significant honors and awards, including 
election to the french Legion of Honor in 1990 and the Wolf Prize for 
physics in 1993. In 1987, he began teaching mathematics part-time at 
Yale — ultimately receiving his first tenured faculty position in 1999, at 
the age of seventy-five. He continued to lecture and work on original 
research, right up to his death, on october 14, 2010.
In the early 1990s, Mandelbrot sensed that the moment had arrived 
to move back into finance, and this time he had more success. over 
the previous three decades, his ideas had developed and matured —
benefiting greatly from their application to other fields — and so when 
he returned to thinking about economics, he had a much larger set 
of mathematical tools on which to draw. Meanwhile, markets had 
changed, so that far more practitioners on Wall Street and elsewhere 
were equipped to understand and incorporate Mandelbrot’s ideas. It 
was at this point that the recognition of fat-tailed distributions reached 
the financial mainstream. But I am getting ahead of the story. It would 
take a blackjack sharp and a dilettantish ex-physicist to move finance 
to a place where it could take advantage of the insights of Bachelier, 
osborne, and, ultimately, Mandelbrot.

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T
he year is 1961. the place, Las vegas. It’s a Saturday night in 
the middle of June. the temperature is hovering around 100 de-
grees even though the sun has already set. Inside the casinos, 
no one cares. vegas is at the height of its postwar golden age. A dozen 
world-class resorts, the first of their kind, line the nascent Strip, from 
the Sahara in the north to the tropicana in the south. the loud, smoky 
casino floors are packed with tourists from across the country hoping 
to get lucky at the tables, or at least ogle some celebrities. this is the 
vegas of the original Ocean’s Eleven, the vegas of Michael corleone, 
the vegas James Bond visits in Diamonds Are Forever. the vegas of 
elvis and the rat Pack, Liberace and the Marx Brothers.
A slender man with a crewcut, just shy of thirty, is sitting at a rou-
lette table. He stares straight ahead, his face impassive behind a pair of 
horn-rimmed glasses. the crowd packs in around him, boisterously 
throwing chips at the table. But he ignores them. He looks intent, 
deeply focused, though on what is unclear. the minutes tick by and 
the crowd starts to wonder if he’s forgotten about the game. then, at 
the last possible moment, he places his chips on seemingly random 
spots on the board. for one round, it’s black 29, red 25, black 10, red 
Beating the Dealer
c H A P t e r 4

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Beating the Dealer 
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27. on the next, it’s black 15, red 34, black 22, and red 5. to the people 
around him he seems crazy. roulette players often have systems, but 
they’re consistent, like lottery players: you bet your birthday, or your 
girlfriend’s phone number. or, if you like a safer bet, you play a color. 
But this guy’s bets keep changing, as though someone is whispering 
the future into his ear. Whatever he’s doing, it doesn’t seem quite right. 
especially because he’s winning. A lot.
His name is edward thorp. today he is one of the most successful 
hedge fund managers in history. In June of 1961, he was only a few 
years out of graduate school. He had just been hired as an assistant 
professor of mathematics at new Mexico State University. In graduate 
school he had specialized in the mathematics of quantum physics. But 
thorp was also fascinated by games. He was particularly interested in 
strategy games: blackjack, poker, baccarat. even the ancient chinese 
game Go. But on that sweltering vegas night back in 1961, he was play-
ing roulette. this was odd, because the results of spinning a roulette 
wheel should be perfectly random. each spin is independent of the 
spin before and the spin after. there’s no place for strategy.
Back at the roulette table, a man and a woman walk past thorp, 
gulping whiskey sours. A cheer goes up at another table as someone 
from des Moines wins big. distracted for a moment, thorp looks up
— just in time to catch a look of horror from the woman next to him. 
thorp’s hand shoots to his ear. Attracted by the movement, a few by-
standers glance in his direction and catch a glimpse of . . . what is that? 
An earpiece? thorp is already on his feet, gathering his chips and stuff-
ing them into his pockets with one hand while his other hand remains 
pinned to his ear. He pushes his way out of the crowd and hurries 
toward the street.
We’ve seen how Bachelier and osborne used insights from physics to 
propose that markets can be understood in terms of a random walk, 
and how Mandelbrot refined that idea. their work revolutionized the 
study of financial markets, once economists came to appreciate it. But 
all three were firmly ensconced in academia. Bachelier worked at the 
Bourse, but there’s no evidence that he put his ideas to any use there, 
and he certainly never made much money. osborne may have turned 

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to finance in an attempt to feed his family, but he ultimately concluded 
that there was no profit to be had in speculating on the unrelieved 
bedlam of financial markets. Mandelbrot, too, seems to have avoided 
trading.
certainly ideas introduced by Bachelier, osborne, and Mandel-
brot percolated through economics departments and affected how 
traders thought about financial markets. for instance, the 1973 book