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Thread: Thorp, Kelly, & Wall Street's Looming Collapse

  1. #1

    Thumbs up Thorp, Kelly, & Wall Street's Looming Collapse

    The next great crash will be blamed on Ed Thorp! zg

    --------------------------


    This article appears in the July 27, 2007 issue of
    Executive Intelligence Review.


    Yes! It Really Is Gambling


    by Robert Ingraham

    On June 21, during an international webcast, Lyndon LaRouche uttered the following
    comments:
    As a matter of fact, the great danger of a financial crash today, is that most people in what they call economics believe actually not in economics: They believe in gambling. It's called a financial system; it's a gambling system. And people understanding that, ever since Galileo came up with this idea about gambling as the basis of discovering how markets would work, everyone has tried to get a better statistical system for gambling. Like breaking the bank at Monte Carlo, making a killing at Las Vegas, probably one's own. And therefore, these guys who are running the financial world today, depend on the assumption that they've got a "better system"—as they used to have at the race tracks, a "better system" for handicapping the horses. And it would really handicap the bettor, in the end, as he found himself on the street without cash—and being pursued by his lenders.

    But what you've got today, as was typified in the calamity that occurred in August through October of 1998, was that the bettors now rely upon mathematics. And computers have helped them to do this: They can now bet faster, they can do mathematics faster than ever before, statistics faster than ever before. But they're all trying to find the best system of gambling. And they're all competing to get in on what they believe is the best system of gambling. The result is that, when all the gamblers come close to the same system of gambling against each other, but they're all gambling according to the same formula, what happens? They all go down together, in one big flop!
    ----------------------
    Is Mr. LaRouche exaggerating for effect? If you think that is the case, please consider the following chronology:
    • In 1956, an engineer at Bell Labs in Murray Hill, N.J. published in the Bell System Technical Journal, an article titled, "A New Interpretation of Information Rate." The engineer's name was John Kelly, and the article, which was prepared with the help of another Bell engineer, Claude Shannon—famous today as one of the founders of Information Theory—posed the question of whether a mathematical formula could be devised to ensure success in betting on horse races. Kelly answered the question in the affirmative, and his solution, the Kelly Formula or Kelly Criterion, not only became the basis for several betting systems in Las Vegas and Atlantic City, but is also widely used today in financial options trading, where it is sometimes called the "geometric mean maximizing portfolio strategy." Use of the Kelly method, according to one options-trading authority, is intended to "maximize the value of the logarithm of wealth."

    • In 1960, Claude Shannon introduced the Kelly Formula to a mathematics professor at MIT named Edward Thorp. Beginning in 1960, using an IBM Fortran 740 mainframe computer at MIT, Thorp programmed a statistical computer program to win at blackjack. In 1960 and 1961, Shannon and Thorp took several trips to Las Vegas to test their theories on blackjack and roulette. In 1961, Thorp presented his blackjack system in a paper, "Fortune's Formula," to the annual conference of the American Mathematical Association. Then in 1962, Thorp issued a public challenge to casino owners that he could beat their games, travelled to Reno, Nevada, and in two days, doubled his money playing blackjack. Later that year, Thorp published a more popularized version of his method and experiences in the best-selling book Beat the Dealer.
    ...complete article here - http://www.larouchepub.com/other/200..._gambling.html
    Last edited by zengrifter; July 26th, 2007 at 05:04 AM.
    "The dogs bark but the caravan moves on."
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  2. #2
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    Default

    I'll take card playing over day trading anyday!
    Aslan 11/1/90 - 6/15/10 Stormy 1/22/95 -8/23/10
    “There are not one hundred people in the United States who hate The Catholic Church,
    but there are millions who hate what they wrongly perceive the Catholic Church to be.”
    Bishop Fulton J. Sheen

    “It takes a very long time to become young.” Pablo Picasso

  3. #3

    Default

    Wong got an honorable mention in the article, as well. zg
    "The dogs bark but the caravan moves on."
    .....................The Zengrifter Interview (PDF) |
    The Zengrifter / James Grosjean Reputation Debate
    -----------------------------------------
    “Truth, like gold, is obtained not by growth, but by washing away all that is not gold.” — Leo Tolstoy........
    "Is everything a conspiracy? No, just the important stuff." ZG

  4. #4
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    Default

    Quote Originally Posted by aslan View Post
    I'll take card playing over day trading anyday!
    Damn straight. And the tax ramifications are less friendly with day trading.

  5. #5
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    Default

    This guy is a moron. He doesn’t understand the fundamentals of market investments or gambling systems. He’s just another guy complaining about how “gambling is evil.” He’s like the guy at the table who screams about people taking the dealer’s bust card. He’s a stock market ploppy.


    “The engineer's name was John Kelly, and the article, which was prepared with the help of another Bell engineer, Claude Shannon—famous today as one of the founders of Information Theory—posed the question of whether a mathematical formula could be devised to ensure success in betting on horse races.”
    That’s not what that article was about at all! And it didn’t pose that question either. If you read the article you will see that it discussed how to bet if you already knew the outcome of a horse race. That is a very different question, and a metaphorical one at that.


    “The whole idea of Thorp, Black, Merton, et al., is to create "risk-free" betting, by coming up with mathematical formulas which will always guarantee a profit.”
    That’s not the idea at all. Mathematical models like the Kelly Criterion, Sharpe Ratio, Black-Scholes model and Modigliani Modigliani model are simply ways of maximizing profit in relation to the inherent risk involved. All models acknowledge that there is risk involved. He makes it seem like these are “foolproof get rich quick” schemes that most people associate with gambling. They aren’t. He is simply trying to use people’s aversion to “sinful” gambling to make them distrustful of these mathematical models.


    “Picture what would happen if every blackjack player in a Las Vegas casino was part of the MIT blackjack team, and you should understand what is wrong with that picture.”
    In fact, the market is exactly like everyone being a member of the MIT team. Everyone who invests in the market has a long-term +EV. That is just the nature of the market. Historically corporations always generate a profit beyond inflation, the market always rises, and everyone who is involved is playing a +EV game against the house. The reason that people go broke in the stock market is the same reason that they go broke in casinos: They don’t invest (bet) wisely. Many of the day traders try to plan their investments based on “trends” or “indicators” of a particular stock. We’ve seen these same people in casinos raising their bets after a win (trends) or a loss (indicators) and waiting for the roulette ball to land on black 3 times before betting. These people are not using intelligent systems. What makes it worse is that they are investing in one stock and not diversifying their portfolio. In BJ terms, they are overbetting their bankroll and not spreading to multiple hands.

    But, if the players have the advantage won’t they still win in the end? After all, with a +EV game even a progression player will win, won’t he? Well, maybe not. Again, the problem is that they are not investing (betting) properly. If they are overbetting then they are guaranteed to go broke even though they are playing a winning game. If they are underbetting then they will not be making much of a profit on their money. Sound familiar? It should. After all, it is our understanding of gambling games that gives us the biggest edge in the investment world. Everybody say it with me: “Always bet in proportion to your advantage while maintaining an acceptable level of risk.”

    The goal of investing is not to find “trends” or “indicators” that will suddenly turn profitable. The game is already profitable. The goal is to invest your money in proportion to you bankroll so that you never go broke. There will always be positive and negative variance. The goal is to “hang on” and make it to the long run where you’re profits are historically guaranteed. That’s why mathematical models that work for gambling games are readily applicable to investment games and vise versa.

    -Sonny-

    P.S. – I’ll be giving real estate seminars next Spring.

  6. #6

    Default

    Ingraham's article appeared in EIR, which is a Larouche publication. SO, his point is that too much wealth is concentrated in market 'advantage gambling' and not enough in 'real-world' infrastructure development.

    And, consequently, the ENTIRE global economic foundation is now de facto bankrupt - all of the main players - the central banks, the big institutions - are primarily playing the system without regard for future-vision physical economy. zg

    "The dogs bark but the caravan moves on."
    .....................The Zengrifter Interview (PDF) |
    The Zengrifter / James Grosjean Reputation Debate
    -----------------------------------------
    “Truth, like gold, is obtained not by growth, but by washing away all that is not gold.” — Leo Tolstoy........
    "Is everything a conspiracy? No, just the important stuff." ZG

  7. #7
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    Default gambling and the market

    Day trading and even short term is gambling that iis legalized by the government for big busines,small business, and the revenues it raises which I have no problem with . You make some you pay some . My entire stock market history was and is 1,000 shares of Mobil , now exxon mobil , that i got as a college graduation present and have held it now for close to 41 years although I did borrow against it once to buy my first house in 1974 . Long term you are the house and the house always wins long term for sure with a few exceptions and variances . Last year we figured with the splits and the accumulated shares I now have I would get whacked on income tax and especially since I reinvested all my dividends back into stock . However it is and will provide a great retirement for me and give a huge security blanket to my children and their grandchildren as well upon me going to the casino in the sky . When i sold my business 2 years ago the government killed me on taxes like 36% which is alot better then the 1980's when taxes could go as high as 60% if memory serves .Be happy and keep dealing the cards !!!!!

  8. #8

    Default

    Quote Originally Posted by glovesetc View Post
    When i sold my business 2 years ago the government killed me on taxes like 36% which is alot better then the 1980's when taxes could go as high as 60% if memory serves .Be happy and keep dealing the cards !!!!!
    Taxes were never 60% (or 90% in the '70s) for smart players. Taxes are an advantage play. Most are tax-ploppies. zg
    "The dogs bark but the caravan moves on."
    .....................The Zengrifter Interview (PDF) |
    The Zengrifter / James Grosjean Reputation Debate
    -----------------------------------------
    “Truth, like gold, is obtained not by growth, but by washing away all that is not gold.” — Leo Tolstoy........
    "Is everything a conspiracy? No, just the important stuff." ZG

  9. #9
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    Default re taxes

    in the 80's taxes were much higher then current taxes and when you add state , federal , city, and county taxes in the bite is big !!!!!!1

  10. #10
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    Quote Originally Posted by Sonny View Post
    -Sonny-

    P.S. – I’ll be giving real estate seminars next Spring.
    And I'll be there to listen. Excellent critique!
    Aslan 11/1/90 - 6/15/10 Stormy 1/22/95 -8/23/10
    “There are not one hundred people in the United States who hate The Catholic Church,
    but there are millions who hate what they wrongly perceive the Catholic Church to be.”
    Bishop Fulton J. Sheen

    “It takes a very long time to become young.” Pablo Picasso

  11. #11

    Default Thorp helped fund the Mirage for Milken

    "Far more important to the government’s case against Milken was evidence that it obtained when 50 armed troopers stormed the offices of a hedge fund called Princeton-Newport. The founder of this hedge fund, Edward Thorp, once partnered with the Genovese organized crime family to develop a system for cheating Las Vegas casinos. He wrote a seminal book on counting cards in black jack, and soon after, he was a critical – perhaps the most critical – figure in the Milken operation.

    The base of Milken’s operation was the high-yield debt department of Drexel Burnham Lambert in Beverly Hills. From there, he underwrote and sold billions upon billions of dollars worth of junk bonds. Hence the moniker, “the junk bond king.”

    But most observers believe that Milken derived a greater part of his fortune from a web of private partnerships and personal brokerages that traded, and often manipulated, not just the debt, but also the stock of public companies. Most profitable of all Milken’s businesses were two Chicago-based brokerages – Belvedere Securities and EGM partners – that he co-owned with the Genovese Mafia card-counter Edward Thorp." more....http://www.marketrap.com/article/vie...ichael-milken#
    Last edited by JSTAT; October 24th, 2009 at 12:12 AM.

  12. #12

    Default

    The govt deemed Thorp an unindicted co-conspirator of Milken. zg

    More on the Milken/Wynn Connection here -
    The "Truth" about Ken Uston's Death

    More on the Uston/Thorp/Leary Connection here -
    The white stuff in Ken Uston's nose
    "The dogs bark but the caravan moves on."
    .....................The Zengrifter Interview (PDF) |
    The Zengrifter / James Grosjean Reputation Debate
    -----------------------------------------
    “Truth, like gold, is obtained not by growth, but by washing away all that is not gold.” — Leo Tolstoy........
    "Is everything a conspiracy? No, just the important stuff." ZG

  13. #13

    Default

    Quote Originally Posted by zengrifter View Post
    The govt deemed Thorp an unindicted co-conspirator of Milken. zg

    More on the Milken/Wynn Connection here -
    The "Truth" about Ken Uston's Death

    More on the Uston/Thorp/Leary Connection here -
    The white stuff in Ken Uston's nose
    Leon Black, another lieutenent of Milken, also remains unscathed from the Drexel disaster. Black's Apollo Management owns much of Harrah's Entertainment while cleaning out the California Public Employees Retirement System (CalPERS). http://www.reuters.com/article/marke...36325420091019
    Last edited by JSTAT; October 24th, 2009 at 10:01 AM.

  14. #14

    Default

    Quote Originally Posted by JSTAT View Post
    Leon Black, another lieutenent of Milken, also remains unscathed from the Drexel disaster. Black's Apollo Management owns much of Harrah's Entertainment while cleaning out the California Public Employees Retirement System (CalPERS). http://www.reuters.com/article/marke...36325420091019
    The article says NOTHING about Black's Apollo "cleaning out CalPERS" zg
    "The dogs bark but the caravan moves on."
    .....................The Zengrifter Interview (PDF) |
    The Zengrifter / James Grosjean Reputation Debate
    -----------------------------------------
    “Truth, like gold, is obtained not by growth, but by washing away all that is not gold.” — Leo Tolstoy........
    "Is everything a conspiracy? No, just the important stuff." ZG

  15. #15

    Talking

    Quote Originally Posted by zengrifter View Post
    The article says NOTHING about Black's Apollo "cleaning out CalPERS" zg
    The Reuters article said "Indeed investors, including Calpers, helped Apollo raise a $14.8 billion fund in December last year, at a time when raising new funds was hard for private equity firms."CalPERS acquired 10% of Apollo along with investing $4 billion with Black. CalPERS allocates 14% of its approximately $200 billion in Alternative Investment Programs, Apollo is the dog of this program. They are on its way to cleaning out that part of the retirement program in my opinion. Thanks for pointing out my mistake zg, at least it won't be on the Google search engine.
    Last edited by JSTAT; October 24th, 2009 at 05:53 PM.

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