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How to Start Using Uncertainties
Methods of Prosperity newsletter no. 133: Edward O. Thorp
Sean Allen Fenn
January 01, 2026
Happy New Year! Nothing is certain about 2026. Odds are that nothing happens out of the ordinary, but anything is possible. You might win the lottery. The stock market could crash. It’s possible that Bitcoin falls to $50k. Grey aliens from Beta Reticuli could land their flying saucer on the Great Lawn of Central Park. The only thing we can expect is the unexpected. But if that’s true, is it really unexpected?
Uncertainty is not something to fear or avoid. Rather, it’s a field of probabilities you can navigate with intelligent decisions.
“In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities.”
Edward Oakley Thorp is an American mathematics professor, hedge fund manager, and blackjack player.
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“If you want to understand science, you have to understand math. …The good thing about business is that you don’t have to know any higher math.”
The exception to this idea is Edward Oakley Thorp. He’s an American mathematician, author, and hedge fund manager. He’s best known as the father of card counting in blackjack. He’s an early pioneer of quantitative investing.
Thorp was born on August 14, 1932, in Chicago and later grew up in Southern California. He studied at UC Berkeley and then UCLA, where he earned a PhD in mathematics in 1958. Thorp was a mathematics professor at MIT and New Mexico State University. As well as the University of California, Irvine.
In the early 1960s he used computers and probability theory to analyze blackjack. He demonstrated that players could gain an edge with card counting. Then he published these ideas in his bestselling book Beat the Dealer.
While at MIT, Thorp collaborated with Claude Shannon. They built the first wearable computer, designed to predict roulette outcomes. As well as to gain a statistical advantage. They used it as a covert device operating in casinos. Their device allowed them to bias bets toward likely winning numbers. It demonstrated a practical application of information theory in gambling.
Thorp later applied his probabilistic and statistical methods to financial markets. In 1969, he launched Princeton/Newport Partners. It was one of the first market‑neutral quantitative hedge funds. He became influential in options pricing and statistical arbitrage. He wrote Beat the Market. Following that, he wrote his memoir A Man for All Markets. It described his quantitative investing approach. Thorp is a pioneer of modern applications of probability theory.
The truth is, most people confuse risk with danger. Thorp understands risk as quantifiable probability. It’s something you can measure, manage, and exploit for advantage.
“People mostly don’t understand risk, reward and uncertainty. Their investment results could be much better if they did.”
Have you heard of the Kelly Criterion? It’s the mathematical formula that determines optimal bet sizing. Besides bets, it applies to investments to maximize long-term growth. It calculates the percentage of your capital to wager. That is, based on the probability of winning and the potential return. The Kelly Criterion is an effective formula to help manage risk.
John Larry Kelly Jr., a researcher at Bell Labs, described the criterion in 1956. Thorp demonstrated the practical use for gambling. He used the same criterion to explain diversification in investment management.
Thorp applied computers to analyze blackjack probabilities. This was in the late 1950s and early 1960s, using the IBM 704. Thorp built on the Kelly Criterion from John L. Kelly Jr.’s 1956 paper. He developed card-counting strategies that could overcome the house edge. Especially in single-deck games.
He tested this system in casinos with backing from professional gambler Manny Kimmel. And guess what? Thorp won significant sums, often using disguises to avoid detection. Casinos responded by increasing the shuffling of decks.
His book, Beat the Dealer (1962, revised 1966), proved card counting’s effectiveness. It became a New York Times bestseller with over 700,000 copies sold. Thorp’s book sparked a blackjack revolution. It earned him induction into the Blackjack Hall of Fame. He also developed systems for baccarat and the “Thorp count” for backgammon endgames.
This is the paradox of prosperity that confounds the greedy:
Even with an edge, over-betting destroys you. Sure, you can have an advantage. But you still need to avoid ruin. Understand the correct size for your exposure to uncertainty.
“The stock market also is a game of imperfect information and even resembles bridge in that both have their deceptions. As in bridge, you do better in the market if you get more information sooner and put it to better use.”
You won’t find success by eliminating uncertainty. Learn to make decisions with incomplete data. Instead of considering how possible an outcome is, consider how probable it is.
For example, while it’s possible that you will win the lottery, it’s not probable. Especially if you never buy a lotto ticket.
Sure, it’s possible that you can beat the market with individual stocks, but it might not be probable. Not unless you have a crystal ball. That’s why buying and holding index funds are the simple way to invest.
The worst thing you can do is never invest. Imaging going through your whole life having no assets. That would be hell.
On the other hand, betting on a random horse without any knowledge of the jockey or the race track is crazy.
“The surest way to get rich is to play only those gambling games or make those investments where I have an edge.”
Don’t play games you can’t win. Don’t pretend to know something when the reality is, you have no idea.
It’s less risky to stay within your circle of competence.
Do you have an edge? Go for it.
But rigorously identify where probability tilts in your favor. Then, and only then, commit capital.
“Assume you may have an edge only when you can make a rational affirmative case that withstands your attempts to tear it down.”
Be able to calculate probabilities and manage risk with mathematical precision. Size your bets optimally. Understand uncertainty.
Thorp demonstrated that you can transform randomness into reliable wealth.
He beat the dealer, beat the market, and lived to tell the tale with $800 million to show for it.
It’s funny that Munger says business requires no higher math.
Thorp mastered the mathematics of probability.
He proved that it’s possible to transcend business entirely.
Does that mean you can enter the realm of extracting wealth from pure chance itself?
For me, it’s going to take a miracle.
I like you,
– Sean Allen Fenn
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