Reader’s Diary

William Poundstone

This book is about the “Kelly formula” (explained on the author’s web site) which, despite the book’s subtitle, is not so much a betting system but a money management system for gamblers.  It also applies to stock market investing, which says something about the nature of the market vs. the casino.

The Kelly formula is based on the observation that even a gambler with inside information that gives him a substantial edge – or the investor who succeeds in identifying “inefficiencies” in the market – can go broke if he dumps all his money into a enough bets that don’t turn out as expected.  The formula gives the gambler/investor a way to determine  just how much of his stake to place on each bet/investment. By applying the formula he can maximize his profit at the cost of volatility.  The volatility can be reduced by betting at “less than Kelly”,  a precaution that also allows for errors in the bettor/investor’s estimate of the numbers that are the inputs to the formula.

Poundstone explains the Kelly concept in non-mathematical terms and tells the stories of people who developed it and used it.  In the course of the book he introduces the reader to scientists, gamblers, mobsters, and investment gurus (and charlatans).  The connective thread is the story of  Edward O. Thorp who famously “Beat the Dealer” at blackjack and less famously “Beat the Market“.

All in all, it’s an interesting book taught me a little about a lot of areas I knew little about.  I do wish Poundstone had focused more on the estimates on which the formula depends and on concrete examples of how the average investor – or gambler – might apply the formula.

Danny Wallace

As I’ve said before, Danny Wallace is a funny guy.  This very short book is about his trip to Wallace, Idaho, the self-proclaimed center (or centre, if you’re from the U.K.) of the universe.  It’s amusing, but the topic is too limited and the book too short to provide much scope for his talents.

Apostolos Doxiadis

Uncle Petros is the narrator’s uncle, a mathematician who mysteriously quit math after years of devotion to an “impossible” problem.  The novel contains two intertwined plots: the story of the narrator’s discovery of his uncle’s story and Petros’ story itself.  During the telling of the tales we get some insight into the world of mathematics and some provocative thoughts about choosing goals.  I enjoyed this book; I really should read more fiction from outside of my usual genre boxes.

Tom Knox

This starts as an intriguing pseudo-history/archaeology thriller but turns into a vile psycho killer story about three fourths of the way through.   Avoid it.

Jack McDevitt

I love time travel stories, so much so that I’m not very picky about how good they are.  This story of two friends who travel in time, originally to find a missing father but later for entertainment, isn’t in the first rank of time travel stories.  It doesn’t deliver the sense of strangeness at encountering another time that is, for me, an essential element of the genre.  What it does offer is an unusually original plot element: the profligate use of the characters’ machines to avoid or correct the smallest error or inconvenience.  Raining on your arrival in Renaissance Italy?  Come back in a couple of hours.  This leads to all sorts of interesting situations and makes the whole book, despite it’s faults, a lot of fun.

Thomas A. Bass

This is the story of the founding and early years of the Prediction Company, an early-90′s pioneer in computerized market analysis.   The book is a a typical startup tale.  It’s good reading if you like that sort of thing, which I do.  The question that’s never quite answered is, “were their models accurate, or lucky?”  The main characters (some of who also appeared in Bass’s excellent “The Eudaemonic Pie“) are pioneers of chaos theory and were attempting to apply their mathematical concepts to the possibly random, possibly chaotic, possibly manipulated world of finance.

Although not a technical book, “The Predictors” does contain some cautionary tales for people attempting to apply computer modeling to the markets.  It’s also interesting to see the seeds – in this 1999 book – of our current derivative-generated recession.