Monday, September 11, 2006

Claude Shannon, Speculator

David Warsh at Economic Principals reviews "Fortune's Formula", a new book by William Poundstone on

three men who shared a vivid interest in making money by beating financial markets, though each expressed it in a slightly different way. They are Claude Shannon, the engineer who founded modern information theory at Bell Laboratories; Edward Thorp, a mathematician who collaborated with Shannon when they overlapped for a time at the Massachusetts Institute of Technology, before setting out on a long career as an investor; and John Kelly Jr., a Bell Labs physicist who came up with a controversial formula for betting (or investing, if you prefer) that since has become known as the Kelly criterion.

The book is populated with colorful incidental characters, as well: horse-race tout sheet pioneers John Payne and Moe Annenberg; mobsters Longy Zwillman and Ben "Bugsy" Siegel; G-man J. Edgar Hoover and US attorney Rudolph Giuliani; economists Paul Samuelson and Robert Merton; science fiction authors L. Ron Hubbard and Arthur C. Clarke; conglomerateurs Emmanuel Kimmell and Steve Ross (they built Time-Warner); filmmakers Robert Evans and Mario Puzo; and hedge fund operators Ivan Boesky and John Meriweather (of Long Term Capital Management). All mix and mingle in his pages.

Who would have though that Shannon is said to have had a rate of return of about 28 per cent on his portfolio for about 30 years, compared to 27 per cent for Warren Buffet.

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