Ed Thorp is one of the originals who’s who in Blackjack’s Hall of Fame. A PhD holder in mathematics, Thorp theorized that it was possible to play Blackjack for a profit. All he had to do was figure out how. Beat the Dealer is Ed Thorp’s ground breaking book that detailed the ways and means of winning in the game of 21. His gaming probability theory not only proved to be useful in Blackjack but also became the core foundation in building successful hedge funds.

A Man for all Markets, Ed Thorp’s latest book, details investing lessons he learned from Blackjack strategies.

Blackjack and the Market can both be analyzed

 

Thorp believes that gambling is a lesser version of investing since both are closed system. This means that the outcome is only affected by a limited amount of factors: blackjack-wise, what cards remain to be played and what cards have been played. Though there are more factors considered in investing, the market can still be analyzed based on evaluation of gathered data.

Developing a strategy

 

Ed Thorp developed a strategy to win in Blackjack. His approach taught players when to stand, hit or double based on the player’s two dealt cards and the dealers up card, and the possible make-up of the cards yet to be dealt. Though this approach is no longer possible due to current casino rules, new adaptations to make Thorp’s analysis relevant have been made by some authors.

In investing, Thorp analyzed if a stock is overvalued or undervalued. By considering anomalies in pricing, he was able evaluate stocks and make the right decision in his personal investments.

Testing the strategy

 

Ed Thorp was able to test his gaming theory in the 1950s by using MIT’s IBM computer. Thorp’s research was founded on the Kelly Criterion which is actually a proportional betting system based on the player’s advantage. Today, the availability of computing power is almost unlimited. There are apps and programs available online to help test one’s investing strategy or methodology.

Money management is required

 

It is not a wise move to over bet in any game of Blackjack even if one has the advantage. There should always be a balance between return and risk in a game of Blackjack. It is the same principle in securities investing. A mistake in capital management collapses the market and almost destabilized the whole financial system of USA in 1998. On the other hand too conservative market investors could miss out on huge returns. It is necessary for both Blackjack players and investors to find the right balance between risk and return to get ahead.

Psychology plays a part

 

The swings in Blackjack could prove to be mentally trying for most players. It will be hard to place a big bet if one’s bankroll is depleted. However, one must always trust the “math” that sooner (or later) the player will be at an advantage. It’s the same thing with investing. One has to stay and persevere with his methodology and strategy for sooner than later; the money will come flowing in.