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

A Random Walk Down Wall Street, by Princeton economist Burton 
Malkiel, has become a classic among investors of every stripe; it owes 
a great deal to osborne in particular, though this influence is largely 
uncredited.
But the introduction, and subsequent sharpening, of the random 
walk hypothesis is only part of the story of how physicists have shaped 
modern finance. Physicists have been equally, or even more, influen-
tial in their role as practitioners. ed thorp is a prime example. He 
accomplished what Bachelier and osborne never could: he showed 
that physics and mathematics could be used to profit from financial 
markets. Building on the work of Bachelier and osborne, and on his 
own experience with gambling systems, thorp invented the modern 
hedge fund — by applying ideas from a new field that combined math-
ematical physics and electrical engineering. Information theory, as it’s 
known, was as much a part of the 1960s as the vegas Strip. And in 
thorp’s hands, it proved to be the missing link between the statistics of 
market prices and a winning strategy on Wall Street.
thorp was born at the peak of the depression, on August 14, 1932. 
His father was a retired army officer, a veteran of the first World War. 
When thorp was born, his father was fortunate enough to have found 
work as a bank guard, but money was still tight and the young thorp 
developed an early instinct for thrift and financial savvy. He realized 
he could buy a packet of Kool-Aid mix for a nickel but could make six 
glasses with each packet. So he sold glasses of cold Kool-Aid to WPA 
workers for a penny each. He bet a storekeeper that he could add up 
a tab in his head faster than the cash register and won himself an ice 
cream cone. An older cousin showed him that the slot machines at 
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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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Beating the Dealer 
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his local gas station were rigged so that if you jiggled the handle right, 
they would pay out.
When World War II began, the thorps headed west to find work 
in defense manufacturing. they settled down in Lomita, california, 
just south of Los Angeles. Both parents took jobs, leaving thorp to 
fend for himself. It was around this time that he discovered something 
even more exciting than betting on his quick head: blowing stuff up. 
He started with a children’s chemistry set, a gift from his parents, and 
ultimately set up a junior mad scientist’s lab in the garage. While his 
parents helped with the war effort, thorp was building pipe bombs 
and blowing holes in the sidewalk with homemade nitrocellulose. 
Later his tinkering would expand to include playing with telescopes 
and electronics, including ham radios.
thorp’s boyhood penchant for explosives belied a deep fascination 
with the science behind his experiments, and along the way he learned 
a considerable amount of chemistry and physics. In 1948, at the end 
of his sophomore year in high school, thorp signed up to take an All 
Southern california test in chemistry, competing for a scholarship to 
the University of california. When he told his chemistry teacher of his 
plan, the teacher was dubious. thorp was over a year younger than 
the other competitors, who were preparing for college. But after the 
teacher gave thorp a practice exam, he was convinced. thorp didn’t 
know everything, but he had clear aptitude. thorp’s teacher recom-
mended three books for thorp to read and gave him a stack of practice 
tests to work on over the summer.
When the test results came back, thorp learned that he had come 
in fourth overall. the results were remarkable, but he knew he could 
do better. the version of the test he took included a new section that 
hadn’t been on the previous year’s test, and it had called for a slide 
rule. thorp had a ten-cent slide rule, small and poorly machined. the 
numbers didn’t always line up correctly, introducing errors in thorp’s 
calculations. thorp was convinced that if he’d had a proper slide rule, 
he would have won the competition. the problem was that he couldn’t 
take the chemistry test again. So the following year he signed up for 
the corresponding test in physics. this time he came in first and won 

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the scholarship, which paid his way through UcLA. He’d successfully 
parlayed backyard explosives into college tuition.
Since it was physics rather than chemistry that had gotten thorp 
to UcLA, he decided to make it his major. four years later, he stayed 
on for graduate school. thorp loved his studies, but graduate school 
wasn’t a natural choice for him, given his lack of means. If not for the 
scholarship competition, it’s unlikely that he would have been able to 
afford college. And now, when he was twenty-one, money was as big an 
issue as ever. thorp mustered a budget of $100 a month — about $850 
in 2012 dollars — half of which went immediately to rent. Strapped for 
cash, thorp began scheming about ways to make a little extra money 
on the side, à la his childhood exploits.
It was a conversation on just this topic — how to make extra money 
without much work — that first got thorp thinking about roulette. It 
began as a debate at the UcLA cooperative Housing Association din-
ing room in the spring of 1955, just as thorp was preparing to finish his 
master’s degree in physics. the first Las vegas casinos had just begun 
to open, and gambling was a hot topic. one of thorp’s friends sug-
gested that gambling was a good way to get rich quick. the problem, 
someone else pointed out, was that you usually lose. After a discussion 
of whether it was possible to get an advantage at various games (that is, 
improve your chances so you win more often than you lose), roulette 
came up. Most of thorp’s colleagues argued that roulette was a terrible 
choice for a get-rich-quick scheme. Maybe if the wheel had something 
wrong with it, certain numbers would come up more often than oth-
ers. But the wheels at big casinos, like the ones in Las vegas or reno, 
were made so precisely that you could never find an imperfection to 
exploit. roulette wheels were as close to random as you could get, and 
without some special trick, the odds were against you.
thorp didn’t disagree with the premise. But he thought the conclu-
sion was wrong. After all, he reasoned, physicists are good at predict-
ing how things like wheels behave. If a roulette wheel really is perfect, 
well, then shouldn’t normal high school physics be enough to predict 
where a ball starting at such and such a place, rolling around a wheel 
spinning with such and such velocity, would land? You don’t need 
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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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