Appendix B Math: Risk and Resilience

Probability theory was devised largely for a very practical reason—gambling. Predicting the amount of money one could make by “risking” capital at the card table and roulette wheel was probability theory's “killer app.” A handsome profit can be had by correctly predicting the future outcome of a game of chance. Indeed, study of this killer app accelerated for the next 200 years and continues today. Edward Oakley Thorp (1932–), an American mathematics professor, author, hedge fund manager, and blackjack player best known as the “father of the wearable computer,” demonstrated perhaps the most dramatic application of probability theory to gambling in 1961. Thorp used a concealed computer to beat the blackjack tables in Las Vegas. He documented his technique in a best seller titled Beat the Dealer in 1962. (His technique is the famous card counting method.)

Thorp was following in the footsteps of Geronimo Cardano (1501–1576)—a famous Milanese physician. More importantly, he was also a compulsive gambler, earning the name “gambling physician.” Gambling drove Cardano to formulate early ideas that later became the basis of modern risk assessment. He combined probability estimates with gains and losses—consequences—to formulate the early idea of risk. He was concerned with predicting how much money might be made by repeatedly playing a certain game and, on the downside, how much money might be lost. Cardano intuitively understood risk as his ...

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