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

Beating the Dealer 
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made their vegas trip. despite their small profit, by the time they left 
vegas, thorp knew that he and Shannon wouldn’t continue the rou-
lette project. But it was just as well. With the blackjack and roulette 
experiences under his belt, thorp was ready to try his hand at a new, 
bigger challenge: the stock market.
thorp bought his first share of stock in 1958, before he had finished 
his Phd. He was living on a modest salary as an instructor at UcLA, 
but he had managed to cobble together a small sum to put away for the 
future. over the next year, his investment dropped by half, and then 
slowly inched its way back up. thorp sold, essentially breaking even 
after a year-long roller-coaster ride.
In 1962, flush with blackjack winnings and the proceeds from his 
card-counting book, he decided to try again. this time he bought sil-
ver. In the early 1960s, demand for silver was sky high — so high that 
many people expected the open-market value of the silver in U.S. coins 
to exceed the coins’ denominations, which would make quarters and 
silver dollars more valuable as scrap metal than as money. It seemed 
like a safe bet. to maximize his profits, thorp borrowed some money 
from his broker, with the silver investment as collateral. Silver went 
up for most of the sixties, but it was very volatile; not long after thorp 
bought in, the price fell temporarily, but sharply, and the broker de-
cided he wanted his money back. When thorp couldn’t come up with 
the cash, the broker sold thorp’s silver, at a loss of about $6,000 to 
thorp. It was devastating — over half the annual salary for an assistant 
professor in 1962.
After this second setback, thorp decided to get serious. After all, he 
was a world-renowned expert in the mathematics of gambling. And 
the stock market wasn’t so different from a casino game or a horserace: 
you make bets, based on some partial information about the future, 
and if things go your way, you get a payout. You can even think of 
market prices as reflections of the “house” odds, meaning that if you 
can get access to even partial relevant information, you can compare 
market odds and true odds to determine whether you have an advan-
tage, just as in blackjack.
All thorp needed was to figure out a way to get information. thorp 

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began his careful study of markets in the summer of 1964, by reading 
The Random Character of Stock Prices — the collection of essays that 
featured papers by Bachelier, osborne, and Mandelbrot. thorp was 
soon convinced by osborne and the other authors in the collection 
who argued that when you look at the detailed statistics, stock prices 
really do behave randomly — because, as Bachelier and osborne both 
argued, all available information was already incorporated into the 
price of a stock at any given moment. By the end of the summer, thorp 
was stymied. If osborne was right, thorp didn’t see a way to gain an 
advantage over the market.
With a full teaching load for the 1964–65 academic year, thorp had 
little time for anything else. He put his market studies aside, plan-
ning to return to the project the following summer. In the meantime, 
things in new Mexico took a turn. A growing faction of mathemati-
cians working in a different field had taken control of the department, 
prompting him to look for other jobs. He learned that the University 
of california was preparing to open a new campus, about fifty miles 
south of Los Angeles, in the middle of orange county. He applied 
for, and received, a job at the new University of california, Irvine. It 
looked as if work on the stock market would have to be deferred fur-
ther, since he now had another major move to plan and a new depart-
ment to settle into.
Still, he remained interested in the project, and at some point dur-
ing the year, while scanning advertisements in investment magazines, 
thorp came across a publication called the RHM Warrant Survey. War-
rants are a kind of stock option, offered directly by the company whose 
stock is being optioned. Like an ordinary call option, they give the 
holder the right to purchase a stock at a fixed price, before a fixed expi-
ration date. throughout the middle of the twentieth century, options 
weren’t traded widely in the United States. Warrants were the closest 
thing to an option available. RHM claimed that trading warrants was 
a possible source of untold wealth — if you understood them. Implicit 
was that most people didn’t know what to do with warrants. this was 
just the kind of thing thorp was looking for, and so he decided to 
subscribe. But he didn’t have much time to look at the documents that 
began arriving.
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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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