Fortune's Formula (11 page)

K
IMMEL DID NOT WANT
to go to Las Vegas. He intimated to Thorp that he was too well known there. So during MIT’s spring recess, Thorp and Kimmel flew to Reno for the experiment. Kimmel was accompanied, again, by two young women. They checked into the Mapes Hotel at around 2:00 a.m. Eddie Hand was to meet them in a couple of days. The Mapes was the first Nevada high-rise offering grand-hotel luxury in a state of motels. Kimmel insisted on a huge suite for himself and the women.

After a night’s sleep, Thorp and Kimmel drove to a small casino outside of town. This was to be a practice session, with the experiment proper not beginning until Hand arrived. Thorp played with minimal bets, winning a little money. This boosted his confidence that he was able to count cards, adjust bet size, and play under real conditions.

The card-counter must adjust the size of bets according to the deck’s composition. For the most part, blackjack is a game of even-money bets. This means the odds are 1 (to 1). The Kelly formula of
edge
/
odds
reduces simply to
edge
.

The edge varies depending on what cards remain in the deck. It may be positive, zero, or negative. The Kelly system says not to bet at all unless you have a positive edge. Thorp was afraid he’d look conspicuous sitting at a table and watching intently, betting only occasionally. He concluded he would have to place at least a minimal bet on every hand.

In a moderately favorable situation, a card-counter might have a 51 percent chance of winning. Out of a hundred such dollar bets, he could expect to win 51, ending up with $102. The edge is 2 percent (the $2 profit divided by the $100 wagered). When the deck is like this, the Kelly formula says to bet 2 percent of the bankroll.

This estimate is not exact because of the features of splitting pairs and doubling down. In uncommon situations it is to the player’s advantage to add to bets already placed. The effect of this is to reduce the optimal bet somewhat.

The out-of-town casino closed three hours in observance of Good Friday. Thorp and Kimmel drove back to Reno, scouting small casinos in which to practice. Since the rules vary slightly, they wanted to select casinos with the most favorable rules.

Kimmel was known at the casino they chose. He excused himself, telling Thorp it was best that he not be seen there. (Throughout the trip, Kimmel was running into casino people he knew: neither side appeared delighted to renew the acquaintance.) Thorp spent the rest of the day playing alone, much of it on a losing streak. The loss was only about a hundred dollars, due to the small bets, but this annoyed Thorp. He refused to go to bed.

At about 5 a.m., Thorp got a table all to himself. He got off on the wrong foot with the dealer.

Why can’t I play two hands?
Thorp asked.

House policy
, he was told.

Eight other dealers let me play two hands. It can hardly be house policy.

It’s so you don’t crowd the other players.

There’s no one else here. Your reason does not seem to apply.

The dealer dealt as quickly as possible. Thorp counted just as fast. The deck turned sharply favorable. Thorp let several bets ride, then bet $20 a hand. By the end of the deck, he had recovered his $100 loss.

On Saturday afternoon Thorp had a massive brunch with Kimmel. He had a story to top Thorp’s. Using the count system at a big hotel, Kimmel had won $13,000. Then he’d lost $20,000. Reason: the dealer was a cheat.

The casino had brought in a “knockout dealer,” an expert card-sharp who cheats for the house. The cheat was a stern fortyish woman with black hair going gray. Kimmel saw how she did it. When dealing her own hand, she would sneak a peak at the top card. If she didn’t like what she saw, she dealt the second card instead. Kimmel had the impression that the count system was powerful enough to overcome this type of cheating. (It’s not.) Kimmel refused to leave the table. He poured back his profit and $7,000 more. Kimmel demanded to see the casino owner. He accused the dealer of cheating. The owner justified it by explaining that a rich Texan had won $17,000 the night before. They couldn’t afford any more losses.

After the meal, Thorp and Kimmel returned to the out-of-town casino where they’d gambled the previous day. With larger bets, Thorp won several hundred dollars in a few minutes of play. This whetted Kimmel’s appetite. He sat down at the same table. After two hours they were ahead $650. Then the dealer began shuffling the deck early, well before the end of the deck had been reached. That was bad. Shuffling erases the sometimes-profitable concentrations of cards that card-counting identifies. They could hardly complain, so Thorp and Kimmel left.

Eddie Hand arrived that evening. The experiment could officially begin.

Kimmel and Hand had originally offered a bankroll of $100,000. Thorp talked them down to a $10,000 bankroll. With a $100,000 bankroll, the Kelly bets would have been in the thousands of dollars, even with a moderate advantage. Thorp wasn’t comfortable staking that kind of money; it was more than the table limits of the time anyway. Ten thousand was enough to test the system.

To simplify things somewhat, Thorp decided to use $50 as the minimum bet. He would double it to $100 when the deck had about a 1 percent edge; bet $200 when it had about a 2 percent advantage; and finally, bet $500 (the usual maximum bet in 1961) when the edge hit or exceeded 5 percent.

Kimmel pulled out a wad of bills and counted out $10,000 for Thorp. Thorp started gambling with Hand while Kimmel went off on his own. They began at Harolds Club in downtown Reno. Run by a family of carnies, it was known as a folksy, low-pressure place where dealers advised novice bettors and tolerated the gamut of working-class America’s darker impulses. It was said that management occasionally stepped in and refunded 10 percent of a big loser’s losses, topping it off with the friendly advice to get out of town pronto. Signs posted around the casino
SAID NO ONE CAN WIN ALL THE TIME. HAROLDS CLUB ADVISES YOU TO RISK ONLY WHAT YOU CAN AFFORD
.

Thorp and Hand installed themselves at a $500 maximum table. They won about $500 in fifteen minutes. Then the dealer pressed the secret button on the floor.

T
HE BUTTON WAS CONNECTED
to the private office of Harold S. Smith, Sr. Smith worked behind double-thick double-locked doors, connected by phone line to the security catwalks, where an army of unseen operatives inspected the play from behind miles of one-way mirrors. Smith kept himself alert with dozens of cups of hot black coffee a day. Many days, he never went home. Dealers at Harolds Club were expected to inform Smith whenever someone was winning too much too fast. Cheating was getting more scientific, Smith well knew. A recent operation in the club had used cards marked with an ink visible only in infrared light. The cheater wore special contact lenses to see the markings.

Then there was ESP. Smith suspected that some players were using telepathic powers to win.

Smith had made a lifelong study of luck. He believed in a higher force that governed the ebb and flow of fortune. Smith called this force “Lady Luck.” It was after all a literal wheel of fortune that started the Smith family’s ascent to wealth. Smith’s father, Raymond I. Smith, known as “Pappy,” left Vermont for the lure of the midways. Pappy operated the wheel and nail game at carnivals. The marks bet on a number, and Pappy spun the wheel. Should a chosen number come up, the customer won a pocketknife.

Through long hours and miserly thrift, Pappy built a nest egg. Not being a gambling man himself, he plowed his life savings into the stock market. Pappy lost nearly everything in the 1929 crash.

As an out-and-out game of chance, the wheel of fortune was illegal. Pappy needed to earn enough money before the sheriff closed him down to pay the fine and move on to the next town. When Nevada legalized gambling, Pappy saw a chance to settle down. He teamed up with Harold, the twenty-six-year-old son he had abandoned, and bought a Reno bingo parlor for $500. Father and son opened it as Harolds Club in 1936.

Harolds Club’s theme was the Old West. The staff dressed like cowpokes. The club displayed “the world’s biggest gun collection”—derringers, pistols, rifles, cannons, machine guns—and most of the guns had drawn blood. That firepower came in handy one morning in 1937. Harold got word that the mob intended to bust up Harolds Club. Organized crime already ran at least one of the clubs in Reno and controlled prostitution. At about ten in the morning, when the club was nearly empty, seven mob enforcers came in, brazenly pushing over furniture.

Smith pulled a loaded .38 from under the roulette table. “You’re not going to shoot any dice,” Smith said, “so just turn around and walk out the door.” According to Smith, the mobsters turned and left the building, never to bother the club again.

As Pappy grew older, he fretted about succession. Harold, the casino’s namesake, was an alcoholic and compulsive gambler. He would go on weeklong benders in which he would gamble, wear a cowboy outfit, ride a horse, and shoot guns. The rival casinos eagerly extended Harold credit. They would have liked nothing better than to gain control of Harolds Club, their biggest, most successful rival. Pappy was afraid Harold would gamble using his stock in the club as collateral.

Pappy himself did not own stock in the club, taking only a salary. Harolds Club had just three stockholders: Harold, his ex-wife Dorothy, and his older brother, Raymond.

Harold had resented Raymond since childhood. Well into middle age, he was seething over a boyhood incident in which Raymond had forced Harold to eat hen manure. Harold especially rued his own decision to give Raymond a one-third share of the club in return for helping out. Harold never dreamed that the one-third ownership would soon make Raymond a millionaire.

Harold could console himself with the thought that he owned twice as much stock as Raymond—until his divorce. Wife Dorothy was a sucker for a man in uniform. Wartime Reno was full of them. In due course the Smiths took advantage of Reno’s second industry. Dorothy got the house, the kids, and half of her husband’s stock.

Dorothy and Raymond were just as concerned about Harold’s drinking as Pappy was. In 1949 Pappy came up with a solution. It was a
stock option
. The Smith family forced Harold to sign a document giving Pappy the right to buy all of Harold’s stock for $500,000
if
the stock were ever offered for sale in the next five years. The stock was worth much more than that, maybe $8 million. Bottom line: Harold would never offer his stock for sale, not unless he was out of his mind. Even then, the option would take precedence over a drunken sale to an outsider.

This Machiavellian experiment in family finance was a qualified success. Harold didn’t gamble his patrimony away. The option expired, unexercised, in 1954.

All the while, Harold fumed that he was being treated like an irresponsible child. He began scarfing handfuls of Miltowns, a prescription tranquilizer that is a dangerous mix with alcohol. Harold’s behavior became erratic. On August 9, 1956, he noticed a moth fluttering around his room. Instead of being drawn to the light, it
avoided
it. This impressed Harold as an almost supernatural manifestation. A doctor talked Harold into checking into St. Mary’s Hospital. Not until a nurse took his temperature with a metal thermometer did he understand exactly where he was. It was the “psycho ward.”

After the nervous breakdown, Harold vowed not to touch another drop of alcohol for four years. He kept this oath. At its completion, he celebrated with a thirteen-day drinking spree. Smith then vowed not to drink again for six years. He was still on that pledge when the bell rang informing him that something was happening on the casino floor.