Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street

In the most direct human terms, LTCM’s problem was group-think. Under John Meriwether, there was an organizational culture in which questions of risk were pressed only so far. This appears to have led to systematically rosy projections. Too little of the fund’s brainpower went to skeptical probing of what could have gone wrong.

For reasons mathematical, psychological, and sociological, it is a good idea to use a money management system that is relatively forgiving of estimation errors.

The Kelly formula says that you should wager this fraction of your bankroll on a favorable bet: edge/odds The edge is how much you expect to win, on the average, assuming you could make this wager over and over with the same probabilities. It is a fraction because the profit is always in proportion to how much you wager. Odds means the public or to

The infinite expectation is a big problem for anyone who wants to use math to decide what to do in the real world. It implies that no amount of money is too much to pay for the privilege of playing this game. Were a casino to charge a million dollars to play this game, rational customers should jump at the chance, it would seem. Same if the casino

Latané called his approach to portfolio design the geometric mean criterion. He demonstrated that it is a myopic strategy. A “near-sighted” strategy sounds like a bad thing, but as economists use it, it’s good. It means that you don’t have to have a crystal ball on what the market is going to do in the future in order to make good decisions now. Th

The core of John Kelly’s philosophy of risk can be stated without math. It is that even unlikely events must come to pass eventually. Therefore, anyone who accepts small risks of losing everything will lose everything, sooner or later. The ultimate compound return rate is acutely sensitive to fat tails.

Within a few years as U.S. Attorney, Giuliani was probably the nation’s best-known crime-fighter since J. Edgar Hoover. That was due both to how many important convictions he secured and to his genius for promoting them. Though Giuliani expanded the U.S. Attorney’s office to 132 assistants, he presented himself as the iconic figurehead of that offi

Meriwether did not himself possess a first-rate mathematical mind. Instead, he recruited the top academic talent. No finance professor was more respected than Robert C. Merton. Merton had consulted for Salomon Brothers, so Meriwether already knew him. He agreed to come on board. Meriwether’s other great coup was recruiting Myron Scholes. As journal

The Kelly system manages money so that the bettor stays in the game long enough for the law of large numbers to work.