Edward Thorp, The Black-Scholes Model, & The Nobel Prize

"Another games player who switched to finance early was Ed Thorp, the mathematics professor who invented blackjack card counting. In 1961, he wrote Beat the Dealer about how he won in casinos. Less well known his his 1967 book, Beat the Market (with Sheen Kassouf). Ed did not wait for public options trading in1973; he began buying and selling warrants (options issued directly by corporations rather than by created exchanges) in the 1960s. He applied the same principles of careful mathematics and controlled risk taking to the market as he had to blackjack and has compiled an unequaled 40-year track record of high-return, low-risk investing.

In coming up with a trading strategy for warrants, Ed discovered a handy formula. A few years later, three finance professors independently came up with their own slight mathematical variant of the same formula. Ed Thorp, Myron Scholes, Robert Merton, and Fischer Black all had almost the same formula, but each had a different reason for believing it was true. Ed showed that it was a way to make money, Scholes that it was required for market efficiency, Merton that it had to be true or there would be arbitrage, and Black that it was required for market equilibrium. Black's insight turned out to be the most important, although it would take him 20 more years to work out its full implications. Merton and Scholes shared a Nobel Prize for their work; Black died by that time or he certainly would have been included. Thorp missed out on the Nobel, be he got rich using the formula, while Merton and Scholes had disastrous personal financial results. Black's dislike of risk kept him from either extreme.

...All four of these guys are extraordinary geniuses. Some people think Black was the smartest, but I suspect that's because he fit the anti-social, half-crazy popular image of a genius. Ed's the most fun to have dinner with, Scholes in the best lecturer, and Merton's best if you want to sit down and work out some math."

(Source: The Poker Face of Wall Street (Wiley 2006), Author: Aaron Brown)