Members of the finance and investment community are often loath to acknowledge any connection between investing and gambling. William Poundstone, a Pulitzer Prize nominee, has written an interesting book, Fortune’s Formula, that goes beyond the mathematics and brings to life the sometimes seamy underbelly of business and investment management.

Poundstone attempts to marry the two by examining the theory and history of something called, the Kelly criterion. This formula prescribes how much a gambler (or investor) should wager on a given outcome so as to maximize the compound growth of one’s bankroll. The Kelly criterion is well known in the world of gambling, but according to Poundstone is seriously unacknowledged in the world of academic finance and investment management.

The book is in large part the story of Ed Thorpe and his rise in the worlds of academic mathematics, gambling and investment management. Thorpe has written himself about these topics, but this book puts his work into a larger context. Although less well known the genius of Claude Shannon, and John Kelly himself, also play an important role in the manuscript.

Most investment books are poorly conceived and poorly written. Investors are better off trying to better educate themselves about the broader world of science, mathematics and finance than to read about the latest and greatest, foolproof investment strategy. Fortune’s Formula, while flawed, is a good addition to an investor’s reading list.

Other reviews on the web:

Elwyn Berlekamp in American Scientist pens a learned review that is generally favorable, but acknowledges issues with the book.

In my experience, abstract financial mathematics is the only truly significant commonality between the world of finance and the world of racetracks and casinos. Poundstone has been lured by Kelly’s colorful terminology into seriously overemphasizing the relevance and importance of whatever other relationships might exist. Portrayal of the seamy side of business is a genre that runs at least as far back as the novels of Charles Dickens. Readers who are looking for something in that vein as well as a light introduction to financial mathematics will find things to relish in Poundstone’s book.

BusinessWeek gives the book 4 out of 5 stars.

Fortune’s Formula will appeal to readers of such books as Peter L. Bernstein’s Against the Gods, Nassim Nicholas Taleb’s Fooled by Randomness, and Roger Lowenstein’s When Genius Failed. All try to explain why smart people take stupid risks. Poundstone goes them one better by showing how hedge fund Long-Term Capital Management, for one, could have avoided disaster by following the Kelly metho

James Pressley in with another favorable review.

The book meshes science with storytelling, evoking a cast of characters that stretches from J. Edgar Hoover and shady bookies to Nobel laureate economist Paul Samuelson, with cameo appearances by the likes of actor Paul Newman and composer John Cage. The potboiler treatment is highly readable, though at times distracting, as the book actually revolves around three brainy guys and a slew of equations.

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.

Please see the Terms & Conditions page for a full disclaimer.