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

Beating the Dealer 
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quantum physics or rocket science to figure out how balls roll around 
wheels. the fact that roulette wheels are so perfectly manufactured 
could only help: there aren’t going to be small imperfections in the 
wheel that might throw off your calculations, and each wheel should 
be pretty similar to every other.
to test his hypothesis, thorp started doing experiments. He did a 
few calculations and then bought a cheap, half-size wheel and filmed a 
ball going around it so he could watch, frame by frame, how it behaved. 
Meanwhile, he thought about how to put his idea to use. Major casinos 
accept bets even after the ball is moving, so in principle it’s possible to 
know the initial speed and position of the wheel and ball, which ought 
to be all you need to calculate where the ball will land, before you make 
your bet. He fantasized about building a machine that could quickly 
make the necessary calculations. But he didn’t get very far. vegas rou-
lette wheels might be flawless, but the toy wheel he bought was a piece 
of junk. Watching the films convinced him that the wheel was useless 
for his experiments; professional wheels, meanwhile, cost well over 
$1,000 — an impossible investment for an impoverished grad student.
So thorp gave up on roulette, at least for a while. After finishing his 
master’s degree, he began working on his doctorate, again in physics. 
He quickly realized, however, that his mathematical background wasn’t 
sufficient to tackle the newest topics. He made a list of the courses he 
would need to take, most of which were in a then-burgeoning field 
known as functional analysis, and discovered that if he took them all, 
he’d have enough for a Phd in mathematics, while his work on physics 
would have just begun. And so he switched to math. All the while, his 
ideas about the physics of roulette spun around in his mind. He was 
sure that with the right resources — a professional roulette wheel and 
some computer know-how — he could strike it rich.
Soon after finishing his Phd, thorp was awarded the prestigious 
c.L.e. Moore instructorship in mathematics at MIt — a position held 
a decade earlier by John nash, the pioneering mathematician profiled 
by Sylvia nasar in her book A Beautiful Mind. thorp and his wife, viv-
ian, left Southern california and moved to cambridge, Massachusetts. 

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they spent only two years on the east coast before moving back west, 
to new Mexico. But it was enough to set their lives on a different track: 
it was at MIt that thorp met claude Shannon.
Shannon may be the only person in the twentieth century who can 
claim to have founded an entirely new science. the field he invented, 
information theory, is essentially the mathematics behind the digital 
revolution. It undergirds computer science, modern telecommunica-
tions, cryptography, and code-breaking. the basic object of study is 
data: bits (a term Shannon coined) of information. the study of things 
such as how light waves move through air or how human languages 
work is very old; Shannon’s groundbreaking idea was that you could 
study the information itself — the stuff that’s carried by the light waves 
from objects in the world to your retinas, or the stuff that passes from 
one person to another when they speak — independently of the waves 
and the words. It is hard to overstate how important this idea would 
become.
Information theory grew out of a project Shannon worked on dur-
ing World War II, as a staff scientist at Bell Labs, At&t’s research divi-
sion in Murray Hill, new Jersey. the goal of the project was to build an 
encrypted telephone system so that generals at the front could safely 
communicate with central command. Unfortunately, this was hard to 
do. there is only one code system that can be mathematically proven 
to be unbreakable. It’s called a one-time pad. Suppose you start with 
a letter that you want to send to your friend but that you don’t want 
anyone else to read. Say the letter has 100 characters in it, including 
spaces. to protect the letter with an unbreakable code, you need to 
come up with a random list of 100 numbers (corresponding to the 
number of characters in the letter) called a key, and then “add” these 
numbers to the characters in the letter. So if the first character in the 
letter is D (for “dear John,” say), and the first number in your random 
list is 5, you want to add 5 to D by moving down the alphabet by five 
letters. So you write down I as the first letter of the coded message. 
And so on. In order to decrypt the letter, your friend needs to have 
a copy of the key, too, which can then be used to subtract the right 
number from each letter and recover the original message. If the key is 
really random, there’s no way to decrypt the encoded message without 
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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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