Comments on: My Review of the New George Gilder Book http://www.arnoldkling.com/blog/my-review-of-the-new-george-gilder-book/ taking the most charitable view of those who disagree Mon, 21 Dec 2020 00:12:22 +0000 hourly 1 https://wordpress.org/?v=4.0.32 By: Mike Gibson http://www.arnoldkling.com/blog/my-review-of-the-new-george-gilder-book/#comment-90364 Wed, 17 Jul 2013 18:03:12 +0000 http://www.arnoldkling.com/blog/?p=1573#comment-90364 I recently read Fortune’s Formula, by William Poundstone. Ostensibly, by the title, the book is about using the Kelly criterion to manage your capital at risk. But really the book is a profile of both Claude Shannon and Edward O. Thorpe. Thorpe is originally famous for writing the seminal book on card counting in blackjack: Beat the Dealer. But he was a mathematician who wrote a paper with Shannon on information theory. (The Kelly criterion was derived from Shannon’s 1948 paper as well.)

What’s fascinating about Thorpe is that in the late 60s, he gave up card counting and started one of the first stat-arb quant funds. By the book’s story, he had returns on par with Warren Buffet for 30 years. Shannon, too, dabbled in trading and did quite well. But the book doesn’t investigate how he derived his competitive advantage.

Poundstone wants to assert that the successful HFT hedge funds (e.g. Renaissance Technologies) operate on information theory and not economics. Since no one knows Renaissance Technologies’ trading strategies, it’s hard to determine. But it is fascinating that all of their employees come from fields like cryptography and mathematics, rather than from finance.

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