Wilmott podcast about blackjack

KenSmith

Administrator
Staff member
First, I'll confess I haven't listened to this yet. I thought it was worth mentioning just because of where it came from...

Paul Wilmott is a "quant", a quantitative financial guru who uses math to beat the markets. He runs a very popular quant website at http://www.wilmott.com
One of the people who hangs out there is Ed Thorp. Yeah, that Thorp, the author of Beat The Dealer.

Here is a link to a recent 40 minute podcast by Paul Wilmott on the subject of blackjack:
http://www.wilmott.com/blogs/paul/enclosures/070521_Wilmott_Podcast.mp3
 

SystemsTrader

Well-Known Member
zengrifter said:
I'm trying to remember if Wilmot was mentioned in Poundstone's Fortune's Formula? I gave away my copy. zg
Yes Wilmott is mentioned in "Fortune's Formula". Not to get off topic here but Fortune's Formula is a great book all blackjack players should read for its discussion of the Kelly formula.
 

sagefr0g

Well-Known Member
i found it interesting that a bunch of financial Guhru's would put so much bank on the principles we discuss here every day lol.....

edit.... and it was interesting his characterization of asymmetries in the game.
 
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zengrifter

Banned
sagefr0g said:
i found it interesting that a bunch of financial Guhru's would put so much bank on the principles we discuss here every day lol.....
More interesting are the economic experts who could not get behind Kelly. Like the guys who headed LTC and ran it into the ground. Thorp jumped on one of the BJ boards back in late'98 and was poking fun at them, pointing out that a novice card-counter demonstrates more risk understanding (with Kelly) than the LTC PHDs did. The book alluded that the main LTC PHD was known to be a "martingale man."


The secret part of the story is that it was intended as a meltdown from the beginning and shadowy forces netted over billions in what appeared as a mega-multi-billion dollar bust and bailout. "And now you know the rest of the story." zg
Long-Term Capital Management - LTCM
A large hedge fund comprising Nobel Prize-winning economists and renowned Wall Street traders that nearly collapsed the global financial system in 1998 as a result of high-risk arbitrage trading strategies.​
The fund formed in 1993 and was founded by renowned Salomon Brothers bond trader John Meriwether.​
Notes:​
LTCM started with just over $1 billion in initial assets and focused on bond trading. The trading strategy of the fund was to make convergence trades, which involve taking advantage of arbitrage between securities that are incorrectly priced relative to each other. Due to the small spread in arbitrage opportunities, the fund had to leverage itself highly to make money. At the height of the fund in 1998 it had $5 billion in assets, controlled over $100 billion and had positions whose worth amounted to over a $1 trillion.​
Due to its highly leveraged nature and a financial crisis in Russia (i.e. the default of government bonds) which led to a 'flight to quality', the fund had sustained massive losses and was in danger of defaulting on its loans. This made it difficult for the fund to cut its losses in its positions. The fund held huge positions in the market totaling roughly 5% of the total global fixed-income market. LTCM had borrowed massive amounts of money to finance its leveraged trades. Had LTCM gone into default there would have been a widespread financial crisis around the globe, caused by the massive write-offs its creditors would have had to make. In Sept 1998, continuing to sustain losses, the fund, with the help of the Federal Reserve and its creditors, was bailed out and taken over. A systematic meltdown of the market was prevented.​

=================

The latest example is a Greenwich, Conn., hedge fund called Long-Term Capital, Ltd. (LTC), which was founded by John Meriwether, a "master of the universe" at Salomon Brothers, along with two Nobel Prize winners, a former Federal Reserve vice chairman and other partners whom Business Week called the "dream team."

Using as much as $100 billion in borrowed money, Long-Term Capital made some disastrously stupid investments and teetered last week on the brink of failure.

What should happen to a firm that makes terrible bets on esoteric markets? It should go bust, of course. Its partners and investors should suffer swift and onerous losses -- at the very least as a signal to others to stay away from risky investments in the future.
Instead, Long-Term Capital is being rescued -- not with government money (thank heaven for small favors) but through not-so-subtle pressure placed by government regulators on banks and investment firms to cough up $3.5 billion. It's a classic case of moral hazard run wild.
 
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Guynoire

Well-Known Member
Kind of scary when you think that there are hedge fund managers who deal with billions of dollars in investments a day, thousands of people's pension funds who don't understand the Kelly Criterion.
 

mdlbj

Well-Known Member
Guynoire said:
Kind of scary when you think that there are hedge fund managers who deal with billions of dollars in investments a day, thousands of people's pension funds who don't understand the Kelly Criterion.
Its even scarier that most people here refuse to see how some of the most successful card counters used it and how they do not think learning from them is worth a grain of salt.

The fundamentals will get you there, greed and guts will get you no where. I love the point he make aout not getting blinded by all of the details.
 
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EasyRhino

Well-Known Member
For those looking to save time, he starts to talk about basic strategy about 21 minutes in, card counting about 26 minutes in. Starts talking about betting at 32.5 min. LTCM at 38 min.

What is "fortune's formula" by bill poundstone actually about?
 
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SystemsTrader

Well-Known Member
EasyRhino said:
What is "fortune's formula" by bill poundstone actually about?
It's about how investors and gamblers used the Kelly formula to make their fortunes. It's very well researched and written in easy to understand terms without getting math heavy. Thorp is a big part of the book for both his blackjack and hedge fund contributions. Most blackjack players don't realise it, but Thorp while famous for his "Beat the Dealer" was really one of the all time great hedge fund managers. It also covers John Kelly the guy who proposed the Kelly formula while working for Bell Labs. There is an excellent section called "All gambles are alike" which explains the huge ups and downs your account will experience.
 

zengrifter

Banned
SystemsTrader said:
It's about how investors and gamblers used the Kelly formula to make their fortunes. It's very well researched and written in easy to understand terms without getting math heavy. Thorp is a big part of the book for both his blackjack and hedge fund contributions. Most blackjack players don't realise it, but Thorp while famous for his "Beat the Dealer" was really one of the all time great hedge fund managers. It also covers John Kelly the guy who proposed the Kelly formula while working for Bell Labs. There is an excellent section called "All gambles are alike" which explains the huge ups and downs your account will experience.
And it turns out that the FIRST TIME Kelly theory was applied to a real-world money-making application was Thorp/BJ at the suggestion of Nobel Laureate Claude Shannon.

I have encountered MANY supposed hot-shot traders who are clueless about Kelly. zg
 

SystemsTrader

Well-Known Member
zengrifter said:
I have encountered MANY supposed hot-shot traders who are clueless about Kelly. zg
You can't imagine how true this statement is. A lot of hot-shot traders I've met are simply lucky because they have no concept of risk management, but eventually it catches up with most of them. The sad thing is they are usually investing other peoples money when they go down.
 

Tarzan

Banned
It was interesting

I was amused of the comparisons of investments to gambling but hey, look at what Ed Thorp is doing these days! Back then, somewhere around 1998-2000 range I took a HEAVY hit like everyone else. I had lots of diversity as was recommended but that didn't matter much.

The beginning was sort of long-winded and boring but the most crucial points made were toward the end in the generalizations of linear gain versus exponential gain versus variance and risk level, all of the basic factors of playing blackjack and how these very basic generalizations correlate to financial planning in general. I am no genius of financial markets but I know you can be the best card-counter going and if you don't have the money-management skills to go with it you are doomed! That's why I am always trying to read more, learn more and compare it all with historical aspects of my live and practice play and what has occurred; I am constantly reviewing financial gains and losses, looking for the best formula to maximize gains with reasonable minimization of risk. Why go to all this trouble? Because in my opinion, it's stacked up against you and you need every single tiny sliver of edge you can muster and compile it all together to stay on top and be successful, otherwise you will be eaten alive.
 
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