From Blackjack to the Market, He Mainly Loves the Challenge

Let’s say you are looking for a good, solid place to invest your money. Low risk. Sizable return. Say 20% a year.

No problem. Just see Edward O. Thorp, former UC Irvine mathematics professor, Las Vegas bank-breaker, and now one of the owners of an investment firm called Princeton/Newport Partners. In 219 months of operation, Thorp’s firm has had only four losing months and has averaged just under a 20% gain annually. You can find him in Newport Center, in close proximity to a bank of computers that makes HAL of “2001” look antediluvian.

There are, however, a couple of hitches. Thorp opens his fund only once a year. Next opening will be in January, 1989. Secondly, he requires a minimum investment of $2 million, which obviously keeps out the paperhangers. (“To invest $2 million,” he said, “requires a net worth of $10 million, which means about 4,000 people in this country.”) Finally, even the $2 million isn’t guaranteed to get you in the club. “If you bang on the door with that money next January,” said Thorp matter-of-factly, “I’ll be happy to wait-list you.” Thorp comes across precisely the same whether he is talking about playing blackjack, running a marathon, investing multimillions in the stock market or winning a Tangletowns contest. Not just sincere, which would do him a disservice, but distressingly, dispassionately rational. Thorp’s rather ordinary appearance--wiry, modest stature, offhand mien--makes the quicksilver elasticity of his mind even more startling, and, in an odd sort of way, warming.

He has always been more concerned with challenge than the money. When a friend showed him an article in the Journal of the American Statistical Assn. on a system to beat blackjack, Thorp was curious to see if it would work. It did, but not well enough for Thorp, who devised a much better system. When that bored him, he turned to the biggest game of them all: the stock market, which he calls “far more interesting than any other forms of gambling because of the enormous number of variables and imponderables involved.” In between, he took on contests just for the sport of it. All this has made him rich but not jaded.

There were plenty of signs of destiny in his early years. A precocious kid born in Chicago and raised in Los Angeles, he breezed through school and spent much of his childhood in a home laboratory where he conducted experiments that made his neighbors decidedly uneasy. He got a BA in physics and a Ph.D. in mathematics at UCLA, marrying an English major named Vivian Sinetar along the way.

His fascination with blackjack--which his associates had figured out was the commercial gambling game in which the house held the smallest edge over the player--started when he was a graduate student. He found that by using the system described in the statistical journal he could play all day on just a few dollars. That wasn’t good enough, so when Thorp began teaching at Massachusetts Institute of Technology, he taught himself to program a computer and poured into it several years of research relating to blackjack possibilities and probabilities. From that came a system that Thorp was convinced couldn’t lose.

But since he had no money to stake himself, he explained the system in a National Academy of Science Journal article that unexpectedly brought him some angels willing to back him in Las Vegas. He won consistently, proving his system and satisfying his curiosity. But temptation lingered, and while he changed his base of operations first to New Mexico State University, then to UC Irvine, he continued to win to the extent that he said he was finally barred from the casinos in Las Vegas, an action he viewed as a challenge.

Thorp took to playing in various disguises, and bringing along team members “so I’d have a witness to whatever happened.” He is convinced that he was drugged one night at a baccarat table. “I’d been winning steadily, and they had been pretty hostile to me. Then all of a sudden they got friendly and asked me if I wanted some coffee. Within 15 minutes, I couldn’t think any more, couldn’t count and finally couldn’t walk straight. It took six hours for the effects to wear off. The next night, I went back and won again, and they brought me a glass of water. I just touched it to my lips, but that much was enough to do me in. I quit playing after that.”

If he was effectively disguised, how could the pit bosses recognize him?

“By the way I played,” he explained. “There’s a lot of intensive peering at the cards, and I vary the size of my bets considerably. I also tend to make a lot of unusual plays, like standing on 16 if the deck is full of high cards. So it becomes clear to anyone watching--and every table is watched from overhead--that I’m either a very good or a very bad player. It doesn’t take long for them to figure out which.”

He tried various other devices, he said, such as “the paper-route method, where I’d play for 15 minutes to an hour and then move on. Or I’d set up different time schedules for playing. But the fun was learning how to do it, and then doing it. After that, it got boring. I hate Las Vegas.”

So as an appropriate parting shot, he wrote a book called “Beat the Dealer” (more than half a million copies sold to date) in which he encapsulated his system in easily understood prose. “When they made it impossible for me to play,” he said, “I figured I’d go after them through other people with my book. It’s worked. They’ve had to change the game repeatedly to try to keep their edge. I’ve met literally hundreds of people who have told me they’ve won at blackjack following the instructions in my book. But to make it work, you have to be disciplined, intelligent and organized.”

Thorp--who said he accumulated a $25,000 stake in Las Vegas and $100,000 in royalties on his book--went back to teaching math at UCI and looking for new challenges. It didn’t take long. The stock market was a tempting plum to a mathematical genius who was teaching courses in probability and functional analysis, especially one who had developed a highly sophisticated relationship with computers.

Thorp focused on a basic investment strategy called hedging--which involves taking advantage of temporary discrepancies between the prices of related securities by buying one and selling the other--and sought a mathematical formula that he might program into his computers to make the operation virtually foolproof.

About this time, he met a New York City stockbroker named Jay Regan who was bored selling stock and wanted some of the action himself. So he and Thorp pooled their money and plunged. They haven’t looked back since. They discovered that they could multiply their assets more quickly with a larger kitty, so they opened a limited partnership and began attracting outside money. Thorp quit his job at UCI and did the research and programmed the computers in Newport Beach. Regan--who, according to Thorp, “was a philosophy major at Dartmouth and has a good, intuitive understanding of things”--handles the accounting and trading out of Princeton, N.J.

Thorp, now 55, walked through his bank of computers, describing each one proudly like a favorite child. “The few things that make the prices of securities different are easy to break out and look at,” he explained. “So when we set up a hedge, we just look at those things. Computers are simply a tool, a lever for our minds. Levers can move things. Archimedes said, ‘Give me a long-enough lever, and I can move the world.’ These machines enlarge our abilities. But people have to write the programs. If you write a novel on a word processor, is the human factor eliminated?”

The human factor is very much a part of Thorp’s life. He and his wife of 32 years live in a 13,400-square-foot house in Harbor Ridge, complete with pool and tennis court (“I’m a B player”). His three children--sons Raun and Jeff, and daughter Karen--are all in their 20s, single and living away from home. Thorp’s interests are catholic. He is an amateur astronomer (he has a telescope on the roof of his home), bridge player (“for the amount I play, I’m pretty good”) and an inveterate runner (averaging 35 to 55 miles a week). He was scheduled to run last week in the Los Angeles Marathon with his daughter, but a last-minute injury forced her to withdraw. Now he plans to run in the Long Beach Marathon in May.

Meanwhile, his mind is in constant motion, seeking challenges, examining them, discarding those that seem pedestrian, exploring those that don’t. Several years ago, he was intrigued by a Tangletowns contest. “Contestants weren’t allowed to use a computer,” he said, “but it looked easy. So I thought it through and entered. It finally came down to a tiebreaker, and I came in fourth. Since then, I’ve figured out a mathematical solution to the problem in case it ever comes around again.”

He won a $2,000 cash prize and a $15,000 car. Winning the car illustrates the way he thinks. In order to be eligible for the car, a bonus prize, he had to buy a $20 subscription to a publication that sponsored the contest. “That $20,” he said, “increased my prospects by $15,000--pretty good odds.”

He noted matter-of-factly that “most people don’t have an intuition for statistics and chance. They think if the red comes up 10 times in a row on a roulette wheel, the odds are better that it will be black the next time. And that’s not true. Chance phenomena are a hard concept to most people. You have to train your mind to understand them.”

He also believes that in any controversy involving the public “the simple argument always prevails. Look at Star Wars. People have an image of a perfect system that zaps everything bad. Countering this image is difficult because the counter argument is complex, and people simply won’t listen.”

Does he think that he might someday be able to come up with a set of mathematical equations that would permit his computers to predict human behavior?

He treated the question seriously. “Some day, maybe. I suppose polling is a crude effort at that now. But we’re a long way from socio-metric equations that would predict human behavior. We need a much more fundamental understanding of our society than we have now. Social science is a curious mixture, mostly not science at all. There are too many paradoxes to permit any sort of accuracy.”

That fact neither pleases nor displeases him. But what does displease him is the fragility of the American economy that he feels contributed to the recent, near-disastrous stock market decline. It didn’t hurt Thorp’s investment group. (“We were down about a half-percent that month. If the decline had been greater, we would have made money.”) But it did illustrate to him “the total lack of accountability of the politicians to the people. The primary blame belongs to President Reagan because this country is acting as if it has a giant, bottomless credit card, and that attitude disturbed the market, set it up for the crash. The rest of us are going to be paying off that credit card for a long, long time.”

But Thorp seems to be able to separate this kind of social criticism totally from his work, which can and does hedge most of the negatives. When he was asked if he had ever been guilty of faulty programming or misjudging an investment situation, he thought it over for several moments, then said simply: “I can’t think of any examples of a situation we really blew. Whenever I figure out something that would cause us to lose, I do something about it.”

From Ed Thorp, that isn’t arrogance. It is quite likely just the simple truth.