John Larry Kelly, Jr
Encyclopedia
Bell Labs
Bell Laboratories is the research and development subsidiary of the French-owned Alcatel-Lucent and previously of the American Telephone & Telegraph Company , half-owned through its Western Electric manufacturing subsidiary.Bell Laboratories operates its...
. He is best known for formulating the Kelly criterion
Kelly criterion
In probability theory, the Kelly criterion, or Kelly strategy or Kelly formula, or Kelly bet, is a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any...
, an algorithm for maximally investing money.
He was born in Corsicana, Texas
Corsicana, Texas
Corsicana is a city in Navarro County, Texas, United States. It is located on Interstate 45 some fifty-five miles south of downtown Dallas. The population was 24,485 at the 2000 census...
. He spent four years in the US Navy as a pilot during World War II before entering the University of Texas at Austin. He graduated with a PhD in Physics in 1953.
Speech synthesis: Enter Hal 9000
In 1962 Kelly created one of the most famous moments in the history of Bell Labs by using an IBM 704IBM 704
The IBM 704, the first mass-produced computer with floating point arithmetic hardware, was introduced by IBM in 1954. The 704 was significantly improved over the IBM 701 in terms of architecture as well as implementations which were not compatible with its predecessor.Changes from the 701 included...
computer to synthesize speech. Kelly's voice recorder synthesizer vocoder
Vocoder
A vocoder is an analysis/synthesis system, mostly used for speech. In the encoder, the input is passed through a multiband filter, each band is passed through an envelope follower, and the control signals from the envelope followers are communicated to the decoder...
recreated the song Daisy Bell
Daisy Bell
"Daisy Bell" is a popular song with the well-known chorus "Daisy, Daisy/Give me your answer do/I'm half crazy/all for the love of you" as well as the line "...a bicycle built for two".-History:"Daisy Bell" was composed by Harry Dacre in 1892...
, with musical accompaniment from Max Mathews
Max Mathews
Max Vernon Mathews was a pioneer in the world of computer music.-Biography:...
. Arthur C. Clarke
Arthur C. Clarke
Sir Arthur Charles Clarke, CBE, FRAS was a British science fiction author, inventor, and futurist, famous for his short stories and novels, among them 2001: A Space Odyssey, and as a host and commentator in the British television series Mysterious World. For many years, Robert A. Heinlein,...
of 2001: A Space Odyssey
2001: A Space Odyssey (film)
2001: A Space Odyssey is a 1968 epic science fiction film produced and directed by Stanley Kubrick, and co-written by Kubrick and Arthur C. Clarke, partially inspired by Clarke's short story The Sentinel...
fame was coincidentally visiting friend and colleague John Pierce at the Bell Labs Murray Hill facility at the time of this remarkable speech synthesis
Speech synthesis
Speech synthesis is the artificial production of human speech. A computer system used for this purpose is called a speech synthesizer, and can be implemented in software or hardware...
demonstration and was so impressed that he used it in one of the climactic scenes of his novel and screenplay for 2001: A Space Odyssey, where the HAL 9000
HAL 9000
HAL 9000 is the antagonist in Arthur C. Clarke's science fiction Space Odyssey saga. HAL is an artificial intelligence that interacts with the astronaut crew of the Discovery One spacecraft, usually represented as a red television-camera eye found throughout the ship...
computer sings the same song as he is being put to sleep by astronaut Dave Bowman.
The Las Vegas connection: Information theory and its applications to Game theory
John Kelly was a remarkable character. Apart from being a physicist he embodied certain stereotypical Texan character attributes being a tough guy, recreational gunslingerGunslinger
Gunfighter, also gunslinger , is a 20th century word, used in cinema or literature, referring to men in the American Old West who had gained a reputation as being dangerous with a gun...
and a daredevil
Stunt performer
A stuntman, or daredevil is someone who performs dangerous stunts, often as a career.These stunts are sometimes rigged so that they look dangerous while still having safety mechanisms, but often they are as dangerous as they appear to be...
pilot all at the same time. He was also an associate of Claude Shannon at Bell Labs. Together they developed a Game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
type method based on the principles of information theory
Information theory
Information theory is a branch of applied mathematics and electrical engineering involving the quantification of information. Information theory was developed by Claude E. Shannon to find fundamental limits on signal processing operations such as compressing data and on reliably storing and...
developed by Shannon. It is reported that Shannon and his wife Betty went to Las Vegas
Las Vegas, Nevada
Las Vegas is the most populous city in the U.S. state of Nevada and is also the county seat of Clark County, Nevada. Las Vegas is an internationally renowned major resort city for gambling, shopping, and fine dining. The city bills itself as The Entertainment Capital of the World, and is famous...
with M.I.T. mathematician Ed Thorp
Edward O. Thorp
Edward Oakley Thorp is an American mathematics professor, author, hedge fund manager, and blackjack player. He was a pioneer in modern applications of probability theory, including the harnessing of very small correlations for reliable financial gain.He was the author of Beat the Dealer, the first...
, and made very successful forays in roulette
Roulette
Roulette is a casino game named after a French diminutive for little wheel. In the game, players may choose to place bets on either a single number or a range of numbers, the colors red or black, or whether the number is odd or even....
and blackjack
Blackjack
Blackjack, also known as Twenty-one or Vingt-et-un , is the most widely played casino banking game in the world...
using this method, later called the Kelly criterion
Gambling and information theory
Statistical inference might be thought of as gambling theory applied to the world around. The myriad applications for logarithmic information measures tell us precisely how to take the best guess in the face of partial information. In that sense, information theory might be considered a formal...
, making a fortune as detailed in the book Fortune's Formula by William Poundstone
William Poundstone
William Poundstone is an American author, columnist, and skeptic. He has written a number of books including the Big Secrets series and a biography of Carl Sagan...
and corroborated by the writings of Elwyn Berlekamp
Elwyn Berlekamp
Elwyn Ralph Berlekamp is an American mathematician. He is a professor emeritus of mathematics and EECS at the University of California, Berkeley. Berlekamp is known for his work in information theory and combinatorial game theory....
, Kelly's research assistant in 1960 and 1962. Shannon and Thorp also applied the same theory to the stock market with even better results.
Over the decades, John Kelly's scientific formula has become a part of mainstream investment theory and the most prominent users, well-known and successful billionaire investors Warren Buffett
Warren Buffett
Warren Edward Buffett is an American business magnate, investor, and philanthropist. He is widely regarded as one of the most successful investors in the world. Often introduced as "legendary investor, Warren Buffett", he is the primary shareholder, chairman and CEO of Berkshire Hathaway. He is...
, Bill Gross and Jim Simons
James Harris Simons
James Harris "Jim" Simons is an American hedge fund manager, mathematician, and philanthropist.In 1982, Simons founded Renaissance Technologies, a private investment firm based in New York with over $15 billion under management; Simons is still at the helm, as CEO, of what is now one of the...
use Kelly methods. Warren Buffett met Thorp the first time in 1968. It's said that Buffett uses a form of the Kelly criterion in deciding how much money to put into various holdings. Also Elwyn Berlekamp
Elwyn Berlekamp
Elwyn Ralph Berlekamp is an American mathematician. He is a professor emeritus of mathematics and EECS at the University of California, Berkeley. Berlekamp is known for his work in information theory and combinatorial game theory....
had applied the same logical algorithm for Axcom Trading Advisors
Axcom Trading Advisors
Axcom Trading Advisors was an early alternative investment management company founded by Elwyn Berlekamp and based in Berkeley, CA. It was acquired by Renaissance Technologies Corp in 1992, whereafter its investment instruments were either subsumed into Renaissance's flagship Medallion Fund. The...
, an alternative investment management company, that he had founded. Berlekmap's company was acquired by Jim Simons
James Harris Simons
James Harris "Jim" Simons is an American hedge fund manager, mathematician, and philanthropist.In 1982, Simons founded Renaissance Technologies, a private investment firm based in New York with over $15 billion under management; Simons is still at the helm, as CEO, of what is now one of the...
and his Renaissance Technologies Corp hedge fund in 1992, whereafter its investment instruments were either subsumed into (or essentially renamed as) Renaissance's flagship Medallion Fund.
But as Kelly's original paper demonstrates, the criterion is only valid when the investment or "game" is played many times over, with the same probability of winning or losing each time, and the same payout ratio.
The theory was also exploited by the MIT Blackjack Team. The MIT Blackjack Team
MIT Blackjack Team
The MIT Blackjack Team was a group of students and ex-students from the Massachusetts Institute of Technology, Harvard Business School, Harvard University, and other leading colleges who used card-counting techniques and more sophisticated strategies to beat casinos at blackjack worldwide...
was a group of students and former students from the Massachusetts Institute of Technology
Massachusetts Institute of Technology
The Massachusetts Institute of Technology is a private research university located in Cambridge, Massachusetts. MIT has five schools and one college, containing a total of 32 academic departments, with a strong emphasis on scientific and technological education and research.Founded in 1861 in...
, Harvard Business School
Harvard Business School
Harvard Business School is the graduate business school of Harvard University in Boston, Massachusetts, United States and is widely recognized as one of the top business schools in the world. The school offers the world's largest full-time MBA program, doctoral programs, and many executive...
, Harvard University
Harvard University
Harvard University is a private Ivy League university located in Cambridge, Massachusetts, United States, established in 1636 by the Massachusetts legislature. Harvard is the oldest institution of higher learning in the United States and the first corporation chartered in the country...
, and other leading colleges who used card-counting
Card counting
Card counting is a casino card game strategy used primarily in the blackjack family of casino games to determine whether the next hand is likely to give a probable advantage to the player or to the dealer. Card counters, also known as advantage players, attempt to decrease the inherent casino house...
techniques and other sophisticated strategies to beat casinos at blackjack
Blackjack
Blackjack, also known as Twenty-one or Vingt-et-un , is the most widely played casino banking game in the world...
worldwide. The team and its successors operated successfully from 1979 through the beginning of the 21st century. Many other blackjack teams have been formed around the world with the goal of beating the casinos.
The card counting techniques have been explained in recent years in Bringing Down the House
Bringing Down the House (book)
Bringing Down the House: The Inside Story of Six MIT Students Who Took Vegas for Millions is a book by Ben Mezrich about a group of MIT card counters commonly known as the MIT Blackjack Team. While represented as non-fiction by Mezrich and Free Press, the book contains significant fictional elements...
, the best-selling book about the MIT Blackjack Team
MIT Blackjack Team
The MIT Blackjack Team was a group of students and ex-students from the Massachusetts Institute of Technology, Harvard Business School, Harvard University, and other leading colleges who used card-counting techniques and more sophisticated strategies to beat casinos at blackjack worldwide...
by Ben Mezrich
Ben Mezrich
Ben Mezrich is an American author from Princeton, New Jersey. He graduated magna-cum-laude with a degree in Social Studies from Harvard University in 1991. Some of his books have been written under the pseudonym Holden Scott. Mezrich attended Princeton Day School, in Princeton, New Jersey...
. In 2008 the book was adapted into the drama film 21
21 (2008 film)
21 is a 2008 drama film directed by Australian director Robert Luketic and stars Jim Sturgess, Kevin Spacey, Laurence Fishburne, Kate Bosworth, Liza Lapira, Jacob Pitts, and Aaron Yoo. The film is inspired by the true story of the MIT Blackjack Team as told in Bringing Down the House, the...