If you had to pick one person who made it possible to analyze and stochastically optimize all the Assets and Liabilities of U.S. Bank Holding Companies, a leading candidate in any such discussion is Edward O. Thorp. In 1966 he published the book Beat the Dealer explaining how to “count cards” to beat the house (the dealer) in the casino card game Blackjack. Thorp famously used an IBM 704 mainframe computer running Fortran programs to solve Blackjack. What is less commonly known is that Thorp’s applied mathematics research for his hedge fund Princeton/Newport Partners very likely had a early version of the Black Scholes equation to use for successful proprietary trading for several decades starting well before the publication of the Nobel Prize winning 1973 Black Scholes paper. Thorp is one of the earliest and most successful practitioners of computational finance in a global market over a sustained time period.
There are many other seminal contributors in the discussion: Chebyshev, Dantzig, Metropolis, Kahan, Moore, Bellman, Stallman, Raineri, Knuth, and Cray come to mind. In this blog we will explore the connections and trace the evolution of their foundational ideas into current research in this corner of computational finance and applied mathematics.