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By Edward O. Thorp
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Before the advent of writing and books, human knowledge was memorized and transmitted down the generations by storytellers; but when this skill wasn’t necessary it declined. Similarly, in our time with the ubiquity of computers and hand calculators, the ability to carry out mental calculations has largely disappeared. Yet a person who knows just grammar school arithmetic can learn to do mental calculations comfortably and habitually. This skill, especially to make rapid approximate calculations, remains valuable, particularly for assessing the quantitative statements that one continually encounters. For instance, listening to the business news on the way to my office one morning, I heard the reporter say, “The Dow Jones Industrial Average [DJIA] is down 9 points to 11,075 on fears of a further interest rate rise to quell an overheated economy.” I mentally estimated a typical (one standard deviation ) DJIA change from the previous close, by an hour after the open, at about 0.6 percent or about sixty-six points. The probability of the reported move of “at least” nine points, or less than a seventh of this, was about 90 percent, so the market action was, contrary to the report, very quiet and hardly indicative of any fearful response to the news. There was nothing to worry about. Simple math allowed me to separate hype from reality.
AuthorEdward O. Thorp BindingHardcover
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