Fortune's Formula : The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

This is one of the most fun reading I've done recently. I think I saw it mentioned in BusinessWeek. The words that caught my interest was "gambling", "stock market", and "Claude Shannon". Especially Late Dr. Shannon. Ever since I got involved in video and audio codec works, I've been interested in finding more about the man who invented a field of science, Information Theory, which brought forth all the digital communication we enjoy today.

Although Dr. Shannon is one of the principal characters in Mr. Poundstone's non-technical (more of historical narrative) book, it's really the "Kelly's Criteria" which was formulated by a Texas physician, John L. Kelly, Jr., that is at the center. The formula gives a guide to how much of one's bankroll to bet given the odd and the "edge" you have (his assertion was it should be edge/odd).

At its opposite at the center, is the "Efficient Market Theory" which is (I believe) still prevailing in the economic and financial circle. This theory states that the market is so efficient that no one can have an edge and exploit it.

And another main character is Ed Thorp who was a math Ph.D when he wrote one of the first to publish a blackjack card counting system. Using the Kelly's criteria, he was able to maximize his earnings in blackjack (which got him banned in many casinos). Then, he found something better than blackjack when he was a professor at U.C. Irvine: stock market. Using math and computers, he was able to exploit the small (and probably temporary) inefficiencies that can be found in the market.

Anyway, it's a fun reading. I can see that in a long term, the market will correct itself. However, I also think that there are always small localized "anomalies" in any complex system (e.g., matter and anti-matter briefly appearing out of "empty" space). Although I won't be able to really make use of the Kelly's criteria, but it sure was fun to read about mafia, casinos, and stock market.