Fortune’s Formula

William Poundstone tells the story of the Kelly formula, worked out at Bell Labs in 1956 by physicist John L. Kelly Jr. and mathematician Claude Shannon, who applied information theory to getting rich as quickly as possible. The formula does not find an edge, but once a bettor has one it says how much to wager. With Edward O. Thorp, an MIT mathematician, Shannon took it to Las Vegas, then to the stock market, where Thorp used it at his hedge fund, Princeton-Newport Partners, and Shannon became a successful investor. Poundstone follows the controversy around the formula even as it earned fortunes for gamblers and traders, and the dark side of a scheme built on exploiting an insider's edge.

Charlie Munger said it gathers much of the modern evidence on the point he was making, and does so in a highly entertaining way.