Fresh Air interview with Ed Thorp

The Fresh Air radio program recently featured Ed Thorp, mathematician and author of the classic card-counting book, Beat the Dealer, and Scott Patterson, Wall Street Journal reporter and author of the new book, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.

From the interview, Patterson's book sounds like a re-hash of how mathematical models, supported by computers, have changed the financial system. New technologies have created the possibility of new forms of speculation, and the demand for maximum rates of return has taken advantage to that possibility.

Thorp comes across as dispassionate and insightful. He recognizes the proper role of models in general. It's not that mathematical models of the world are bad, they just have limits. The "quants" (those who rely on math models for trading, as opposed to, say, the fundamentalists who are studying balance sheets) on Wall Street today "don't have a long history of experiences of what's wrong with models." They are "wowed by the math" and "didn't use them correctly." And so recent history is likely to repeat itself, somehow. "You know something bad is going to happen, you just don't know when."

Although it is popular to call Wall Street (or the modern financial system in general) a giant casino (which Thorp does in the interview), it is important to note that someone like Thorp was not a gambler, even when he was confirming the validity of his models at the blackjack tables in Las Vegas. On Wall Street, he did the same thing. Gambling and the application of theoretical models to acting on probable outcomes of current events share the important factor of risk, but they are fundamentally two different activities.

jd