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PROFESSOR: OK, what
we're going to do,

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00:00:30,740 --> 00:00:33,100
we're going to start our
story in what at the time

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00:00:33,100 --> 00:00:35,590
would have been called the
Northwest United States.

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00:00:35,590 --> 00:00:37,790
We're in the first
part of the 1800s,

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00:00:37,790 --> 00:00:41,550
and we're really talking
about this portion of it here.

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00:00:41,550 --> 00:00:43,550
Although later on in our
story, we'll actually

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00:00:43,550 --> 00:00:47,340
cover this whole region here.

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00:00:47,340 --> 00:00:52,360
This was a sparsely-populated,
impoverished area.

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00:00:52,360 --> 00:00:54,630
There were basically
no roads or towns.

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00:00:54,630 --> 00:00:57,520
There was lots of swamps,
mountains, rivers,

18
00:00:57,520 --> 00:01:00,300
land transportation
was very difficult.

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00:01:00,300 --> 00:01:02,860
The area was more or less
under constant warfare

20
00:01:02,860 --> 00:01:06,040
from 1800 till about 1880.

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00:01:06,040 --> 00:01:10,610
I'm talking about
large scale armies

22
00:01:10,610 --> 00:01:14,530
in what would be called the
Indian Wars, but also smaller

23
00:01:14,530 --> 00:01:18,140
scale raids of dozens
or half a dozen people,

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00:01:18,140 --> 00:01:22,150
and individual murders.

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00:01:22,150 --> 00:01:24,500
It was among the
poorest areas on earth.

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00:01:27,910 --> 00:01:29,050
Who lived there?

27
00:01:29,050 --> 00:01:31,370
Anybody know?

28
00:01:31,370 --> 00:01:38,030
So early 1800s, 1810, 1820 in
the Northwest United States?

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00:01:38,030 --> 00:01:38,989
AUDIENCE: No one?

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00:01:38,989 --> 00:01:39,780
PROFESSOR: Anybody?

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00:01:39,780 --> 00:01:41,090
No, people lived there.

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00:01:41,090 --> 00:01:43,132
AUDIENCE: People
looking for gold?

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00:01:43,132 --> 00:01:45,090
PROFESSOR: Gold miners
were a little bit later,

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00:01:45,090 --> 00:01:48,254
but sure, they would come along.

35
00:01:48,254 --> 00:01:50,170
There were some Native
Americans, many of them

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00:01:50,170 --> 00:01:52,080
had been pushed from
other places, right?

37
00:01:52,080 --> 00:01:55,249
The east coast Native Americans
had been pushed in there.

38
00:01:55,249 --> 00:01:57,040
There were some Native
Americans that lived

39
00:01:57,040 --> 00:02:00,010
there who were resisting that.

40
00:02:00,010 --> 00:02:02,648
There were also Natives being
pushed in from the South

41
00:02:02,648 --> 00:02:05,110
by the people in Mexico.

42
00:02:05,110 --> 00:02:07,870
So we've got people being in.

43
00:02:07,870 --> 00:02:09,539
How about Acadian Driftwood?

44
00:02:09,539 --> 00:02:11,280
Anybody here--?

45
00:02:11,280 --> 00:02:14,000
So the Canadian rebels,
who were French-speaking,

46
00:02:14,000 --> 00:02:16,610
are being pushed
here by the English.

47
00:02:16,610 --> 00:02:17,861
Whiskey Rebellion, right?

48
00:02:17,861 --> 00:02:19,610
The rebellious people
in the United States

49
00:02:19,610 --> 00:02:25,630
are being pushed out here,
escaped slaves, debtors.

50
00:02:25,630 --> 00:02:28,950
There is an expression
at the time, GTT.

51
00:02:28,950 --> 00:02:31,920
If you didn't want
to pay your debts,

52
00:02:31,920 --> 00:02:33,710
you wrote GTT on your door.

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00:02:33,710 --> 00:02:37,200
It meant "Gone To Texas,"
and you headed over here.

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00:02:37,200 --> 00:02:44,460
So we got this area full of
losers, violence, very little

55
00:02:44,460 --> 00:02:47,170
in the way of
economic resources.

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00:02:50,314 --> 00:02:54,050
A few years ago, somebody did
a list of the 100 wealthiest

57
00:02:54,050 --> 00:02:54,975
Americans of all time.

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00:02:54,975 --> 00:02:55,850
And they compared it.

59
00:02:55,850 --> 00:02:59,250
They tried to estimate
the wealth of these people

60
00:02:59,250 --> 00:03:01,780
and they compared it to the
total size of the economy

61
00:03:01,780 --> 00:03:04,190
at the time.

62
00:03:04,190 --> 00:03:08,850
19 of the 100 wealthiest
Americans of all time

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00:03:08,850 --> 00:03:12,340
were in that Northwest
area in 1850,

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00:03:12,340 --> 00:03:16,010
and they made their money
from about 1850 to 1880.

65
00:03:16,010 --> 00:03:17,200
So what happened?

66
00:03:17,200 --> 00:03:21,500
How did this poor economic
place with no prospects

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00:03:21,500 --> 00:03:24,570
for anything, the last place in
the world you'd expect anybody

68
00:03:24,570 --> 00:03:30,360
to get rich, how did it generate
such tremendous fortunes?

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00:03:30,360 --> 00:03:31,490
And it isn't just money.

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00:03:31,490 --> 00:03:33,170
I mean you say, OK,
well, some of them

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00:03:33,170 --> 00:03:35,731
struck gold or oil or
something like that.

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00:03:35,731 --> 00:03:36,730
But listen to the names.

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00:03:36,730 --> 00:03:39,775
It wasn't just robber barons
like Rockefeller, Mellon,

74
00:03:39,775 --> 00:03:41,420
and Carnegie.

75
00:03:41,420 --> 00:03:44,300
It was great inventors like
McCormick, Westinghouse,

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00:03:44,300 --> 00:03:45,710
and Pullman.

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00:03:45,710 --> 00:03:49,680
Innovators in other fields,
such as Swift, Pulitzer, Hearst,

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00:03:49,680 --> 00:03:51,870
Armor, Marshall Field.

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00:03:51,870 --> 00:03:54,810
These people are
household names today.

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00:03:54,810 --> 00:03:58,390
I challenge anybody in this
room to name any other business

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00:03:58,390 --> 00:04:04,900
innovator anywhere in the
world in the entire 1900s.

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00:04:04,900 --> 00:04:07,610
OK, so we got 19 of them
in this little area.

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00:04:07,610 --> 00:04:10,080
And we know them today, right?

84
00:04:10,080 --> 00:04:11,727
None anywhere else.

85
00:04:11,727 --> 00:04:13,560
There were some innovations
in other places,

86
00:04:13,560 --> 00:04:17,182
but here was clearly the
place where modern business

87
00:04:17,182 --> 00:04:17,890
was being formed.

88
00:04:17,890 --> 00:04:20,170
So what was it that they had?

89
00:04:20,170 --> 00:04:23,360
Was it something in the water?

90
00:04:23,360 --> 00:04:26,130
Something in the air?

91
00:04:26,130 --> 00:04:29,520
What did this region have
that nobody else had?

92
00:04:33,496 --> 00:04:34,490
AUDIENCE: Labor?

93
00:04:34,490 --> 00:04:36,410
PROFESSOR: No, it was
very sparsely populated.

94
00:04:36,410 --> 00:04:37,930
Labor was extremely expensive.

95
00:04:37,930 --> 00:04:41,930
And your laborers had to
spend most of their time

96
00:04:41,930 --> 00:04:45,090
eking out subsistence
living, right?

97
00:04:45,090 --> 00:04:48,380
It would be very expensive
to bring in food or supplies

98
00:04:48,380 --> 00:04:49,375
for them.

99
00:04:49,375 --> 00:04:52,750
No, labor was
extremely expensive.

100
00:04:52,750 --> 00:04:55,530
Well, I'll tell you
one thing they had was

101
00:04:55,530 --> 00:04:57,864
they had a game called poker.

102
00:04:57,864 --> 00:04:58,780
[LAUGHTER IN AUDIENCE]

103
00:04:58,780 --> 00:04:59,710
All right, you're laughing.

104
00:04:59,710 --> 00:05:01,710
I hope you won't be
laughing at the end of this.

105
00:05:01,710 --> 00:05:02,390
Let's go back.

106
00:05:02,390 --> 00:05:05,120
The first written records we
have from outside this region

107
00:05:05,120 --> 00:05:07,655
about poker come to us
from about the late 1820s

108
00:05:07,655 --> 00:05:09,719
and the early 1830s.

109
00:05:09,719 --> 00:05:11,260
It's a lot more
interesting what they

110
00:05:11,260 --> 00:05:14,510
don't say than what they say.

111
00:05:14,510 --> 00:05:17,690
One thing they don't say
is, people in this region

112
00:05:17,690 --> 00:05:20,040
played this game called poker,
and here's how it works.

113
00:05:20,040 --> 00:05:22,221
None of them explain
the game at all.

114
00:05:22,221 --> 00:05:23,470
That's kind of strange, right?

115
00:05:23,470 --> 00:05:24,810
Somebody comes and
tells you, hey, there's

116
00:05:24,810 --> 00:05:26,226
this game people
are playing here,

117
00:05:26,226 --> 00:05:27,790
but they don't
tell you the rules.

118
00:05:27,790 --> 00:05:29,910
They didn't even
describe it as a game.

119
00:05:29,910 --> 00:05:31,750
The one thing they
were very clear about

120
00:05:31,750 --> 00:05:36,300
is it involved transferring
large amounts of money.

121
00:05:36,300 --> 00:05:39,700
They also-- nobody said, oh,
it's a variant of this game

122
00:05:39,700 --> 00:05:42,550
or that game somebody
plays somewhere else.

123
00:05:42,550 --> 00:05:47,480
Nobody said, this is some game
you might be interested in.

124
00:05:47,480 --> 00:05:48,439
Everybody already knew.

125
00:05:48,439 --> 00:05:50,229
I mean, it was-- you
can read these things.

126
00:05:50,229 --> 00:05:52,310
It was common knowledge
that people in this area

127
00:05:52,310 --> 00:05:53,870
played a game called poker.

128
00:05:53,870 --> 00:05:56,780
It was a very serious game
played for very large amounts

129
00:05:56,780 --> 00:05:57,440
of money.

130
00:05:57,440 --> 00:05:59,240
It was played nowhere else.

131
00:05:59,240 --> 00:06:01,250
Nobody mentioned
any antecedents.

132
00:06:01,250 --> 00:06:04,170
Nobody said it was brought in
by the French or by the Indians

133
00:06:04,170 --> 00:06:08,880
or by the Persians or
by any other group.

134
00:06:08,880 --> 00:06:09,700
It was just there.

135
00:06:09,700 --> 00:06:13,144
It was there in the area.

136
00:06:13,144 --> 00:06:16,580
A couple other interesting
things about this game.

137
00:06:16,580 --> 00:06:20,695
First of all, what we know that,
far more popular than poker

138
00:06:20,695 --> 00:06:22,820
at any period of time, and
certainly in this period

139
00:06:22,820 --> 00:06:25,560
as well, were standard
gambling games

140
00:06:25,560 --> 00:06:27,640
that are played--
variants of which

141
00:06:27,640 --> 00:06:31,830
are played all over the world
by people of all classes.

142
00:06:31,830 --> 00:06:34,020
Dice games, faro
was very popular

143
00:06:34,020 --> 00:06:37,927
at the time, wheel-based
chance games.

144
00:06:37,927 --> 00:06:40,010
We also know though, the
other kind of game people

145
00:06:40,010 --> 00:06:42,790
were familiar with is played by
aristocrats-- things like whist

146
00:06:42,790 --> 00:06:46,170
or chess-- that don't
necessarily involve gambling,

147
00:06:46,170 --> 00:06:50,220
although they can, and
involve a lot of skill.

148
00:06:50,220 --> 00:06:53,520
Poker was neither of the above.

149
00:06:53,520 --> 00:06:55,490
OK, so let's start
asking, what is there

150
00:06:55,490 --> 00:06:57,750
about poker that was
different from any game that

151
00:06:57,750 --> 00:06:58,824
came before it?

152
00:06:58,824 --> 00:07:01,240
This might give us some clue
as to why this was different.

153
00:07:01,240 --> 00:07:04,050
What was going on here?

154
00:07:04,050 --> 00:07:06,470
Ace beats king.

155
00:07:06,470 --> 00:07:08,930
OK, that doesn't
seem like much today.

156
00:07:08,930 --> 00:07:10,930
That was pretty
revolutionary, right?

157
00:07:10,930 --> 00:07:13,270
You'd go to get executed in
most countries in the world

158
00:07:13,270 --> 00:07:15,470
in those days for saying that.

159
00:07:15,470 --> 00:07:18,307
And an ace was, by the
way, in early poker,

160
00:07:18,307 --> 00:07:19,140
ace was always high.

161
00:07:19,140 --> 00:07:20,520
There was no such thing
as a low/high ace.

162
00:07:20,520 --> 00:07:21,804
So that tells you something.

163
00:07:21,804 --> 00:07:23,220
OK, the people who
made this game,

164
00:07:23,220 --> 00:07:25,170
they weren't monarchists, right?

165
00:07:25,170 --> 00:07:27,382
They were thinking
a different way.

166
00:07:27,382 --> 00:07:28,590
Here's another thing, though.

167
00:07:28,590 --> 00:07:33,375
The hand rankings are
in order of rarity.

168
00:07:33,375 --> 00:07:35,590
The rarer the hand,
the higher it ranks.

169
00:07:35,590 --> 00:07:39,940
And in early poker, we didn't
have straights and flushes,

170
00:07:39,940 --> 00:07:42,142
so it's even more
straightforward.

171
00:07:42,142 --> 00:07:43,850
But here's something
kind of interesting.

172
00:07:43,850 --> 00:07:45,599
Here's something that
changed in the game.

173
00:07:45,599 --> 00:07:49,520
So in the early poker up
until about the 1830s,

174
00:07:49,520 --> 00:07:51,150
this principle that
the rarer the hand,

175
00:07:51,150 --> 00:07:53,940
the more valuable it was was
actually employed much more

176
00:07:53,940 --> 00:07:55,440
consistently.

177
00:07:55,440 --> 00:07:58,100
So today when you
compare two hands that

178
00:07:58,100 --> 00:08:00,520
are of the same
time-- so two people

179
00:08:00,520 --> 00:08:02,010
each have two pair,
two people each

180
00:08:02,010 --> 00:08:05,950
have a pair, two people
each have a nothing hand.

181
00:08:05,950 --> 00:08:09,915
You decide the winner starting
from the highest cards on down.

182
00:08:09,915 --> 00:08:12,040
Right, so if I have two
pair and you have two pair,

183
00:08:12,040 --> 00:08:14,522
we first look at who has
the higher highest pair.

184
00:08:14,522 --> 00:08:16,230
Then we look at who
has the higher lowest

185
00:08:16,230 --> 00:08:18,500
pair if that's a tie.

186
00:08:18,500 --> 00:08:21,610
But in early poker,
it was reversed.

187
00:08:21,610 --> 00:08:24,830
And you can see if you rank
it the way we do today,

188
00:08:24,830 --> 00:08:26,300
we've inverted our principle.

189
00:08:26,300 --> 00:08:29,730
Now, the more common the
hand-- like ace high hands,

190
00:08:29,730 --> 00:08:32,424
there are 500,000 out
of the 1.3 million.

191
00:08:32,424 --> 00:08:34,590
These are hands with no
straight, no flush, no pair,

192
00:08:34,590 --> 00:08:36,495
no match.

193
00:08:36,495 --> 00:08:38,120
The ace high hands
are the most common,

194
00:08:38,120 --> 00:08:40,470
but they rank the highest.

195
00:08:40,470 --> 00:08:43,527
In poker up till about,
like I say, the 1830s,

196
00:08:43,527 --> 00:08:45,360
we ranked it by the
lowest card in the hand.

197
00:08:45,360 --> 00:08:47,193
So you first compared
your lowest card, then

198
00:08:47,193 --> 00:08:48,320
your second lowest.

199
00:08:48,320 --> 00:08:51,620
And there you see we are
true to the principle

200
00:08:51,620 --> 00:08:55,590
that the rarer the hand,
the higher it ranks.

201
00:08:55,590 --> 00:08:58,030
Can anybody see the strategic
difference this makes?

202
00:08:58,030 --> 00:08:59,690
Why is this important?

203
00:08:59,690 --> 00:09:02,872
Is it just completely arbitrary?

204
00:09:02,872 --> 00:09:04,080
What difference does it make?

205
00:09:04,080 --> 00:09:06,340
Let's say we did things
this way in poker.

206
00:09:06,340 --> 00:09:09,550
What difference would
it make to the play?

207
00:09:09,550 --> 00:09:13,460
What it means is aces
are much less valuable.

208
00:09:13,460 --> 00:09:17,090
It's a lot like-- anybody
here every play lowball poker?

209
00:09:17,090 --> 00:09:20,250
Lowball poker, your best
cards don't help you.

210
00:09:20,250 --> 00:09:22,434
The question is,
what's your worst card?

211
00:09:22,434 --> 00:09:23,850
You talk about a
lowball hand, you

212
00:09:23,850 --> 00:09:25,800
talk about the highest card
in my hand that makes it.

213
00:09:25,800 --> 00:09:27,990
You can have four great
cards, and a fifth card

214
00:09:27,990 --> 00:09:28,980
can completely ruin it.

215
00:09:28,980 --> 00:09:31,610
You can ace, king, queen,
jack and then a two,

216
00:09:31,610 --> 00:09:35,920
and you've got a two low hand,
and you lose to everybody else.

217
00:09:35,920 --> 00:09:38,757
In the modern poker,
if you have an ace--

218
00:09:38,757 --> 00:09:40,840
let's say we both have
hands and neither one of us

219
00:09:40,840 --> 00:09:43,790
has any matches or
straight or flush.

220
00:09:43,790 --> 00:09:48,830
If I have an ace, I have an
83% chance that I beat you.

221
00:09:48,830 --> 00:09:51,500
But if we rank them
by low card, an ace

222
00:09:51,500 --> 00:09:53,770
only gives you a 56%
chance of winning.

223
00:09:53,770 --> 00:09:56,854
An ace is much less valuable
because really the difference

224
00:09:56,854 --> 00:09:58,270
between ace, king,
queen, and jack

225
00:09:58,270 --> 00:10:00,436
is very little, because
it's your lowest card that's

226
00:10:00,436 --> 00:10:03,911
going to determine how
strong your hand is.

227
00:10:03,911 --> 00:10:05,910
Now, the biggest point I
want to make about this

228
00:10:05,910 --> 00:10:08,920
isn't the subtleties
of a strategy

229
00:10:08,920 --> 00:10:11,050
when you rank hands this way.

230
00:10:11,050 --> 00:10:13,374
This is a game
that was designed.

231
00:10:13,374 --> 00:10:15,665
This is a game that somebody
thought about, articulated

232
00:10:15,665 --> 00:10:19,710
a rational principle, and
did what was at the time

233
00:10:19,710 --> 00:10:24,390
some pretty clever mathematics
to figure out the ranking.

234
00:10:24,390 --> 00:10:27,500
This is not a game that
evolved by long tradition.

235
00:10:27,500 --> 00:10:29,660
This is not a game where
somebody in a court

236
00:10:29,660 --> 00:10:31,177
sat down and wrote the rules.

237
00:10:31,177 --> 00:10:32,760
This is a game that
somebody designed,

238
00:10:32,760 --> 00:10:36,200
and they designed
it for a reason.

239
00:10:36,200 --> 00:10:37,840
But actually, the
card playing poker

240
00:10:37,840 --> 00:10:40,940
is pretty trivially simple,
and especially straight poker.

241
00:10:40,940 --> 00:10:43,500
It was called straight
poker at the time.

242
00:10:43,500 --> 00:10:47,930
The way the game was played
was you were dealt a card,

243
00:10:47,930 --> 00:10:50,540
you had a betting round, you
were dealt a second card,

244
00:10:50,540 --> 00:10:51,720
you had a betting around.

245
00:10:51,720 --> 00:10:54,090
You were dealt a third card,
you had a betting round,

246
00:10:54,090 --> 00:10:55,866
and then that was
the last round.

247
00:10:55,866 --> 00:10:57,240
The last two
cards-- at the time,

248
00:10:57,240 --> 00:10:58,906
they were called the
turn and the river,

249
00:10:58,906 --> 00:11:01,920
just like in hold 'em
today-- were dealt together,

250
00:11:01,920 --> 00:11:04,590
and there was no betting
after the final card.

251
00:11:04,590 --> 00:11:07,121
I'll tell you why that's
important in a bit.

252
00:11:07,121 --> 00:11:09,120
Another thing about the
way the betting was done

253
00:11:09,120 --> 00:11:11,700
is there was no ante.

254
00:11:11,700 --> 00:11:14,910
There was no blind in the
sense we know it today.

255
00:11:14,910 --> 00:11:17,390
The way the betting
worked-- and again, this

256
00:11:17,390 --> 00:11:19,890
shows some very careful
design on somebody's part--

257
00:11:19,890 --> 00:11:21,950
the dealer dealt the cards.

258
00:11:21,950 --> 00:11:26,140
The person to the dealer's
left was known as the age.

259
00:11:26,140 --> 00:11:28,590
The age posted a
stake, and they could

260
00:11:28,590 --> 00:11:31,410
post any, before they saw
their card, their first card.

261
00:11:31,410 --> 00:11:33,460
They could post a stake,
any amount they wanted,

262
00:11:33,460 --> 00:11:34,510
including zero.

263
00:11:34,510 --> 00:11:36,947
They didn't have
to post anything.

264
00:11:36,947 --> 00:11:38,530
But the rules were
a little different.

265
00:11:38,530 --> 00:11:40,650
On the first-- and this is
only on the first round.

266
00:11:40,650 --> 00:11:42,233
All the subsequent
rounds, the betting

267
00:11:42,233 --> 00:11:44,400
is exactly the same
as modern poker.

268
00:11:44,400 --> 00:11:46,980
But on the first
round, you were not

269
00:11:46,980 --> 00:11:48,900
allowed to call the age's bet.

270
00:11:48,900 --> 00:11:51,360
So let's say the age bets $1.

271
00:11:51,360 --> 00:11:52,300
You cannot call that.

272
00:11:52,300 --> 00:11:54,455
You can fold, or you can raise.

273
00:11:54,455 --> 00:11:57,350
And the minimum raises the
amount to the minimum bet

274
00:11:57,350 --> 00:11:59,290
would be $2.

275
00:11:59,290 --> 00:12:01,940
So this gives a
lot more advantage

276
00:12:01,940 --> 00:12:04,410
to the age compared
to somebody who

277
00:12:04,410 --> 00:12:08,070
posts a blind today, a
blind that can be called.

278
00:12:08,070 --> 00:12:09,609
In a way, you can
see the analogy

279
00:12:09,609 --> 00:12:11,900
between what the age does
and what the small blind does

280
00:12:11,900 --> 00:12:15,690
in poker, that somebody has
to double the bet in order

281
00:12:15,690 --> 00:12:16,190
to play.

282
00:12:16,190 --> 00:12:19,430
Although in modern poker, with
a small blind and a big blind,

283
00:12:19,430 --> 00:12:22,930
someone is forced to
come in and double.

284
00:12:22,930 --> 00:12:25,210
The poker players at the
time were very insistent.

285
00:12:25,210 --> 00:12:27,850
They said poker is not gambling.

286
00:12:27,850 --> 00:12:29,730
And the difference
between poker and gambling

287
00:12:29,730 --> 00:12:34,380
is no one is ever
forced to make a bet.

288
00:12:34,380 --> 00:12:36,435
You look at your
cards, you voluntarily

289
00:12:36,435 --> 00:12:38,310
make a bet that you
think has-- they wouldn't

290
00:12:38,310 --> 00:12:40,226
use the word at the time,
but we would say now

291
00:12:40,226 --> 00:12:43,350
is that you think has
positive expected value.

292
00:12:43,350 --> 00:12:46,150
The first, the blind
bet, was empirically

293
00:12:46,150 --> 00:12:47,570
known to be a winning.

294
00:12:47,570 --> 00:12:50,060
It was an advantage
people posted.

295
00:12:50,060 --> 00:12:52,510
Now mathematically, you can
show that can't be true.

296
00:12:52,510 --> 00:12:54,590
But psychologically
and empirically,

297
00:12:54,590 --> 00:12:57,260
it was true, that posting the
blind with other people being

298
00:12:57,260 --> 00:13:02,560
forced to either double or fold
was empirically an advantage.

299
00:13:02,560 --> 00:13:04,220
Anyone else betting,
they could bet

300
00:13:04,220 --> 00:13:05,520
if they thought they would win.

301
00:13:05,520 --> 00:13:07,925
They didn't have to
bet if they didn't.

302
00:13:11,980 --> 00:13:14,629
So let's talk about
the betting in poker.

303
00:13:14,629 --> 00:13:16,170
There are a couple
of things about it

304
00:13:16,170 --> 00:13:19,460
that are different from any
other game that comes before.

305
00:13:19,460 --> 00:13:21,960
The first one is that at the
end of every betting round,

306
00:13:21,960 --> 00:13:26,150
everyone remaining in the hand
has bet exactly the same amount

307
00:13:26,150 --> 00:13:27,910
of money.

308
00:13:27,910 --> 00:13:30,690
The hand is mark-to-market
after every round.

309
00:13:30,690 --> 00:13:32,320
So ultimately,
you're betting on who

310
00:13:32,320 --> 00:13:34,019
has the best hand
at showdown, or who

311
00:13:34,019 --> 00:13:36,060
has the best surviving
hand at showdown of people

312
00:13:36,060 --> 00:13:37,570
who haven't folded.

313
00:13:37,570 --> 00:13:40,070
But in between the way,
at the end of every round,

314
00:13:40,070 --> 00:13:43,800
the game cannot continue until
everyone remaining in the hand

315
00:13:43,800 --> 00:13:44,915
has bet the same amount.

316
00:13:50,430 --> 00:13:52,770
This didn't last all that long.

317
00:13:52,770 --> 00:13:56,040
So by the 1840s,
1850s, we're saying

318
00:13:56,040 --> 00:14:01,950
there's a lot of fight against
these very strict rules.

319
00:14:01,950 --> 00:14:06,440
People started adding antes.

320
00:14:06,440 --> 00:14:09,160
People started adding
straights and flushes.

321
00:14:09,160 --> 00:14:15,300
People started adding betting
after the final round of cards.

322
00:14:15,300 --> 00:14:18,280
People started adding all kinds
of more complicated games--

323
00:14:18,280 --> 00:14:23,390
draw poker, stud poker
with some cards revealed.

324
00:14:23,390 --> 00:14:25,870
They started adding
new kinds of hands.

325
00:14:25,870 --> 00:14:28,610
So the game starts to
change a little bit.

326
00:14:28,610 --> 00:14:32,615
And R.F. Foster,
who was probably

327
00:14:32,615 --> 00:14:34,240
one of the first
people to really write

328
00:14:34,240 --> 00:14:35,660
a comprehensive
history of poker--

329
00:14:35,660 --> 00:14:38,820
and this was 100
years later, really--

330
00:14:38,820 --> 00:14:39,820
explained what happened.

331
00:14:39,820 --> 00:14:43,080
So there is this
conservative, old game,

332
00:14:43,080 --> 00:14:46,290
scientific based on
very rigid principles,

333
00:14:46,290 --> 00:14:48,400
that eventually evolved
into the modern game.

334
00:14:48,400 --> 00:14:50,290
The modern game, a
lot more fun to play.

335
00:14:50,290 --> 00:14:54,890
The modern game allows
gambling, clearly.

336
00:14:54,890 --> 00:14:59,410
The modern game is really for
a somewhat different purpose.

337
00:14:59,410 --> 00:15:01,080
But so far, we've
talked about the cards

338
00:15:01,080 --> 00:15:03,180
and we've talked
about the betting.

339
00:15:03,180 --> 00:15:05,820
We actually haven't talked about
the most revolutionary thing

340
00:15:05,820 --> 00:15:08,710
in poker that, again, is like no
other game that came before it.

341
00:15:12,480 --> 00:15:15,060
Most gambling games throughout
history-- and remember,

342
00:15:15,060 --> 00:15:16,890
gambling goes back
to human prehistory.

343
00:15:16,890 --> 00:15:20,610
Virtually every culture
has forms of gambling.

344
00:15:20,610 --> 00:15:24,840
But gambling is almost always
done for either goods or cash.

345
00:15:24,840 --> 00:15:29,840
When credit was used, credit
was provided by a trusted

346
00:15:29,840 --> 00:15:30,780
central counterparty.

347
00:15:30,780 --> 00:15:33,350
So somebody who organized the
game might organize credit.

348
00:15:36,200 --> 00:15:39,330
Poker was never played for
cash, never played for goods.

349
00:15:39,330 --> 00:15:41,720
Poker was played
for what were called

350
00:15:41,720 --> 00:15:43,577
at the time "poker checks."

351
00:15:43,577 --> 00:15:45,660
And this is a distinction
that goes all the way up

352
00:15:45,660 --> 00:15:50,830
to about the 1980s before
it finally got erased.

353
00:15:50,830 --> 00:15:56,270
Even as late as the 1980s
when I was playing poker,

354
00:15:56,270 --> 00:15:58,720
there was a distinction,
and people understood it.

355
00:15:58,720 --> 00:16:02,090
There were two similar things
that were often confused.

356
00:16:02,090 --> 00:16:04,930
There were checks,
and there were chips.

357
00:16:04,930 --> 00:16:06,912
And they looked kind of similar.

358
00:16:06,912 --> 00:16:11,150
A check had intrinsic value.

359
00:16:11,150 --> 00:16:12,440
Checks were used for cash.

360
00:16:12,440 --> 00:16:14,370
Casino checks were used
for cash in Las Vegas.

361
00:16:14,370 --> 00:16:15,320
Nobody ever used cash.

362
00:16:15,320 --> 00:16:20,260
You just used casino chips
for all your transactions.

363
00:16:20,260 --> 00:16:24,290
But they were also used for
all different kinds of games.

364
00:16:24,290 --> 00:16:26,450
Chips are just markers.

365
00:16:26,450 --> 00:16:28,670
Chips are things you
buy at the table,

366
00:16:28,670 --> 00:16:31,310
and you're supposed to cash them
in when you leave the table.

367
00:16:31,310 --> 00:16:34,750
You're not even supposed to take
them from the roulette table

368
00:16:34,750 --> 00:16:37,217
over to the craps table
or something like that.

369
00:16:37,217 --> 00:16:38,300
So chips are just markers.

370
00:16:38,300 --> 00:16:41,580
They have no intrinsic value.

371
00:16:41,580 --> 00:16:43,037
There is a complicated
story which

372
00:16:43,037 --> 00:16:45,120
I'd be happy to talk to
you people about sometime.

373
00:16:45,120 --> 00:16:46,330
The IRS came down.

374
00:16:46,330 --> 00:16:51,050
And some casinos, when they
pushed organized crime out,

375
00:16:51,050 --> 00:16:52,620
they got rid of checks.

376
00:16:52,620 --> 00:16:57,290
So right now, there's no such
thing as, a least a legal,

377
00:16:57,290 --> 00:16:59,830
chip with a real,
intrinsic value.

378
00:16:59,830 --> 00:17:01,040
They're just markers.

379
00:17:01,040 --> 00:17:04,381
If you show up to a
casino with a $5,000 chip

380
00:17:04,381 --> 00:17:05,839
and you want to
cash it in, they're

381
00:17:05,839 --> 00:17:07,470
going to ask you
where you got it,

382
00:17:07,470 --> 00:17:10,680
prove that you bought it at a
Casino or won it at a casino.

383
00:17:10,680 --> 00:17:13,400
If you can't, they won't
give you any money for it.

384
00:17:16,579 --> 00:17:19,750
But let's go back
to the early 1800s.

385
00:17:19,750 --> 00:17:21,790
The way poker was played
was with poker checks.

386
00:17:21,790 --> 00:17:24,349
Poker checks were markers.

387
00:17:24,349 --> 00:17:26,040
Often, they were
made out of clay.

388
00:17:26,040 --> 00:17:27,930
People would make little
disks out of clay,

389
00:17:27,930 --> 00:17:29,370
and they would put
a thumb print in it.

390
00:17:29,370 --> 00:17:31,036
They would put some
identifiable marker.

391
00:17:31,036 --> 00:17:36,630
The key thing is that they were
identifiable to an individual.

392
00:17:36,630 --> 00:17:40,190
You were playing poker with
money you created yourself.

393
00:17:40,190 --> 00:17:42,570
And if you lost, other people
would have these markers,

394
00:17:42,570 --> 00:17:45,470
and these markers
would be claims on you.

395
00:17:45,470 --> 00:17:49,110
If you won, you had
other people's markers.

396
00:17:49,110 --> 00:17:50,700
At the end of the
game, people did

397
00:17:50,700 --> 00:17:53,421
something called ring
clearing, which means, oh, OK.

398
00:17:53,421 --> 00:17:54,670
You played a game for a while.

399
00:17:54,670 --> 00:17:56,410
You've got a bunch of
checks in front of you.

400
00:17:56,410 --> 00:17:58,868
You're going to take the checks
you have from other people,

401
00:17:58,868 --> 00:18:01,477
you're going to trade them
for your own checks back.

402
00:18:01,477 --> 00:18:03,560
You're going to end up
with, if you were a winner,

403
00:18:03,560 --> 00:18:06,101
you're going to end up with a
bunch of other people's checks,

404
00:18:06,101 --> 00:18:08,050
and suddenly a bunch of
people owe you money.

405
00:18:08,050 --> 00:18:10,520
Or if you were a
loser, other people

406
00:18:10,520 --> 00:18:12,030
are going to end up with yours.

407
00:18:12,030 --> 00:18:13,405
But it's a winners
responsibility

408
00:18:13,405 --> 00:18:14,600
to collect from the losers.

409
00:18:14,600 --> 00:18:15,933
There's no central counterparty.

410
00:18:15,933 --> 00:18:17,460
There's no trusting.

411
00:18:17,460 --> 00:18:18,460
You play.

412
00:18:18,460 --> 00:18:20,494
If you don't like a
guy's checks, too bad.

413
00:18:20,494 --> 00:18:22,660
You got some things that
aren't-- maybe you can find

414
00:18:22,660 --> 00:18:25,589
somebody else to trade
you something for them.

415
00:18:25,589 --> 00:18:27,880
Now what you've done is you've
created a form of money.

416
00:18:27,880 --> 00:18:31,350
It's this credit creation that
is a really essential element

417
00:18:31,350 --> 00:18:33,437
of early poker.

418
00:18:33,437 --> 00:18:35,520
And let's talk about another
financial institution

419
00:18:35,520 --> 00:18:38,170
from this period-- the
soft money bank, otherwise

420
00:18:38,170 --> 00:18:40,630
called a wildcat bank.

421
00:18:40,630 --> 00:18:42,090
People created banks.

422
00:18:42,090 --> 00:18:44,090
And the way they created
banks is somebody said,

423
00:18:44,090 --> 00:18:48,329
I have a bank, and I'm
going to make loans.

424
00:18:48,329 --> 00:18:50,620
And I'll either print up some
bank notes, some of which

425
00:18:50,620 --> 00:18:52,520
were extremely crude.

426
00:18:52,520 --> 00:18:55,932
People even used markers,
twigs, old tally sticks,

427
00:18:55,932 --> 00:18:56,640
things like that.

428
00:18:56,640 --> 00:19:00,640
They used anything they
could find as bank notes.

429
00:19:00,640 --> 00:19:03,270
Or they just kept an
accounting system.

430
00:19:03,270 --> 00:19:05,920
If you want to spend
the money, somebody

431
00:19:05,920 --> 00:19:09,020
has to deposit it into the bank.

432
00:19:09,020 --> 00:19:12,777
If it worked, this generated
a lot of economic activity.

433
00:19:12,777 --> 00:19:13,860
Everything was successful.

434
00:19:13,860 --> 00:19:15,090
The loans paid off.

435
00:19:15,090 --> 00:19:16,047
Deposits were honored.

436
00:19:16,047 --> 00:19:16,880
Everything was fine.

437
00:19:16,880 --> 00:19:21,530
If it didn't work,
everything was worthless.

438
00:19:21,530 --> 00:19:23,520
If you add one
feature to this, it

439
00:19:23,520 --> 00:19:25,270
comes what most people
think of as a bank.

440
00:19:25,270 --> 00:19:28,860
The one feature we're missing
from this bank is what?

441
00:19:28,860 --> 00:19:29,890
Actual money, gold.

442
00:19:29,890 --> 00:19:30,720
Right.

443
00:19:30,720 --> 00:19:32,750
Now, this is kind of an
interesting dichotomy

444
00:19:32,750 --> 00:19:34,220
in economics.

445
00:19:34,220 --> 00:19:39,320
To me, a classic bank
is a soft money back.

446
00:19:39,320 --> 00:19:42,650
Capital, to me, is an
additional feature that gives it

447
00:19:42,650 --> 00:19:44,070
some credibility, right?

448
00:19:44,070 --> 00:19:45,270
It means two things.

449
00:19:45,270 --> 00:19:46,920
It means the person
creating the bank

450
00:19:46,920 --> 00:19:48,390
is going to have some
skin in the game,

451
00:19:48,390 --> 00:19:50,973
is going to take a loss if the
whole bank collapses, if nobody

452
00:19:50,973 --> 00:19:52,370
ever pays back their loans.

453
00:19:52,370 --> 00:19:55,530
So that shows-- it's a signal to
show they have some confidence.

454
00:19:55,530 --> 00:19:59,700
Also, the cash they put in, the
capital they put in, in theory

455
00:19:59,700 --> 00:20:03,602
is going to help people
if the bank fails.

456
00:20:03,602 --> 00:20:05,310
It'll pay off some
portion of the losses.

457
00:20:05,310 --> 00:20:06,410
In practice, it never does.

458
00:20:06,410 --> 00:20:08,409
In practice, the people
who run the banks always

459
00:20:08,409 --> 00:20:12,360
get their capital out
before anybody else.

460
00:20:12,360 --> 00:20:14,880
But a lot of the legislation
on banks, a lot of the way

461
00:20:14,880 --> 00:20:17,250
people think about
banks, is the opposite.

462
00:20:17,250 --> 00:20:19,960
They think about it as a
classic bank is something

463
00:20:19,960 --> 00:20:22,930
that has 100% capital, and
that fractional reserve

464
00:20:22,930 --> 00:20:28,940
is some kind of like little
extra thing you do to a bank.

465
00:20:28,940 --> 00:20:31,550
But we see, if you look again,
human prehistory cultures,

466
00:20:31,550 --> 00:20:35,400
you see almost all cultures have
some form of this self credit

467
00:20:35,400 --> 00:20:41,480
equation, all kinds of things--
susus, tontines, [INAUDIBLE].

468
00:20:41,480 --> 00:20:43,650
All over the world, we
have these kinds of things,

469
00:20:43,650 --> 00:20:46,240
and they were useful
in the American West.

470
00:20:46,240 --> 00:20:47,729
Well, poker was one of them.

471
00:20:47,729 --> 00:20:49,770
Poker was a way you could
create a form of money,

472
00:20:49,770 --> 00:20:50,600
your own money.

473
00:20:50,600 --> 00:20:52,230
You could play a game.

474
00:20:52,230 --> 00:20:55,940
If you won, you picked up a lot
of credit from other people,

475
00:20:55,940 --> 00:20:57,365
and you could use
that to generate

476
00:20:57,365 --> 00:20:59,005
some economic activity.

477
00:20:59,005 --> 00:21:01,792
If you lost, other people
had to employ you, right?

478
00:21:01,792 --> 00:21:03,500
They had to get their
money back somehow.

479
00:21:03,500 --> 00:21:04,599
You didn't have any money.

480
00:21:04,599 --> 00:21:06,140
They had to find
things for you to do

481
00:21:06,140 --> 00:21:08,380
to work in their businesses.

482
00:21:08,380 --> 00:21:10,869
And this is how
a lot of business

483
00:21:10,869 --> 00:21:12,035
was created in the old west.

484
00:21:14,580 --> 00:21:18,680
Now we're going to move a little
forward to around the 1840s.

485
00:21:18,680 --> 00:21:20,490
Anyone know what this is?

486
00:21:20,490 --> 00:21:22,990
It is the Chicago
Board of Trade.

487
00:21:22,990 --> 00:21:25,960
This is actually around 1900,
so it wouldn't be quite so fancy

488
00:21:25,960 --> 00:21:29,320
back in 1840.

489
00:21:29,320 --> 00:21:33,290
Futures exchanges,
again, appeared

490
00:21:33,290 --> 00:21:37,750
in exactly the same geographic
area as the game of poker

491
00:21:37,750 --> 00:21:40,850
about 20 years later.

492
00:21:40,850 --> 00:21:42,530
Nobody invented it.

493
00:21:42,530 --> 00:21:45,116
Suddenly, these things started
popping up all over the place.

494
00:21:45,116 --> 00:21:46,740
A financial institution
no one had ever

495
00:21:46,740 --> 00:21:50,000
seen before, completely
unlike anything in the past,

496
00:21:50,000 --> 00:21:53,815
none of them outside the region,
ubiquitous inside the region,

497
00:21:53,815 --> 00:21:55,190
and nobody said
they invented it.

498
00:21:55,190 --> 00:21:57,390
There was something
in the culture,

499
00:21:57,390 --> 00:22:00,070
in the way people thought, the
way people did business that

500
00:22:00,070 --> 00:22:02,670
made this a very
natural thing to do,

501
00:22:02,670 --> 00:22:05,280
even though it had
never been done before.

502
00:22:05,280 --> 00:22:09,130
And the analogies with poker
are pretty obvious, right?

503
00:22:09,130 --> 00:22:10,940
Mark-to-market.

504
00:22:10,940 --> 00:22:14,310
Every day, you're betting on the
price of wheat in three months,

505
00:22:14,310 --> 00:22:17,120
but every day you settle up so
that you got the same amount

506
00:22:17,120 --> 00:22:18,750
of money at stake.

507
00:22:18,750 --> 00:22:21,730
Clearing-- again, the initial
exchanges in the early days,

508
00:22:21,730 --> 00:22:24,360
they used ring clearing,
exactly the same as poker.

509
00:22:24,360 --> 00:22:26,340
Later on, they went to
a full clearinghouse

510
00:22:26,340 --> 00:22:28,760
that was a little
more sophisticated

511
00:22:28,760 --> 00:22:31,900
and allowed people to do it.

512
00:22:31,900 --> 00:22:33,650
But what's the purpose
of these exchanges?

513
00:22:33,650 --> 00:22:36,396
What does this futures
exchange do for people?

514
00:22:36,396 --> 00:22:37,987
AUDIENCE: To lock in the price.

515
00:22:37,987 --> 00:22:38,820
PROFESSOR: Like who?

516
00:22:38,820 --> 00:22:39,650
Who would want to
lock in a price?

517
00:22:39,650 --> 00:22:40,596
AUDIENCE: The farmers.

518
00:22:40,596 --> 00:22:40,940
PROFESSOR: OK.

519
00:22:40,940 --> 00:22:42,148
Well, let's think about this.

520
00:22:42,148 --> 00:22:45,470
I'm a farmer in 1840.

521
00:22:45,470 --> 00:22:49,440
I'm about a two-week journey
from Chicago over bad roads.

522
00:22:49,440 --> 00:22:51,940
Normally, I do what farmers
have done since the beginning

523
00:22:51,940 --> 00:22:56,440
of private agriculture.

524
00:22:56,440 --> 00:22:57,940
They would sell to a crop buyer.

525
00:22:57,940 --> 00:22:59,940
I would go to the place
where I buy my supplies,

526
00:22:59,940 --> 00:23:02,440
and there's a crop buyer
who has an agent there,

527
00:23:02,440 --> 00:23:06,191
or that agent also comes by
my farm every month or so

528
00:23:06,191 --> 00:23:08,440
to check out how the crops
are going, because he wants

529
00:23:08,440 --> 00:23:09,570
to keep tabs on the crops.

530
00:23:09,570 --> 00:23:12,020
And also, I can lock
in a price with him.

531
00:23:12,020 --> 00:23:15,037
He will buy exactly my crop.

532
00:23:15,037 --> 00:23:17,120
He will buy whatever
quantity I happen to produce.

533
00:23:17,120 --> 00:23:19,494
He'll agree on a price now,
or he'll set the price later.

534
00:23:19,494 --> 00:23:21,090
Whatever I want.

535
00:23:21,090 --> 00:23:21,730
I deliver it.

536
00:23:21,730 --> 00:23:24,280
I can deliver it to him, or
for a slightly lower price,

537
00:23:24,280 --> 00:23:27,184
he'll come and pick
it up at my farm.

538
00:23:27,184 --> 00:23:28,850
Now let's compare
that with this futures

539
00:23:28,850 --> 00:23:30,490
exchange, a brand
new innovation that's

540
00:23:30,490 --> 00:23:32,590
going to make my life better.

541
00:23:32,590 --> 00:23:35,340
I can take a two-week
journey into Chicago.

542
00:23:35,340 --> 00:23:37,820
I can promise to
delivery set quantity

543
00:23:37,820 --> 00:23:40,720
of a set grade of wheat that
I don't produce that I can't

544
00:23:40,720 --> 00:23:42,742
be sure I will have on time.

545
00:23:42,742 --> 00:23:44,700
I don't know the quantity
I'm going to produce,

546
00:23:44,700 --> 00:23:46,924
but I have to specify that.

547
00:23:46,924 --> 00:23:48,340
I have to put down
initial margin.

548
00:23:48,340 --> 00:23:49,260
I don't have any cash.

549
00:23:49,260 --> 00:23:50,860
All my cash is
tied up in my crop.

550
00:23:50,860 --> 00:23:54,785
Farmers only have
cash after harvest.

551
00:23:54,785 --> 00:23:56,410
And I have to stay
in Chicago every day

552
00:23:56,410 --> 00:23:59,860
to make mark-to-market payments,
since who's growing my wheat?

553
00:23:59,860 --> 00:24:01,924
OK, so this makes
absolutely no sense.

554
00:24:01,924 --> 00:24:03,340
Anytime you read
a textbook and it

555
00:24:03,340 --> 00:24:05,700
talks about farmers
using futures exchanges,

556
00:24:05,700 --> 00:24:08,887
you know they haven't spent half
a second thinking about this.

557
00:24:08,887 --> 00:24:10,720
There were no farmers
involved in setting up

558
00:24:10,720 --> 00:24:12,140
the futures exchanges.

559
00:24:12,140 --> 00:24:14,570
In fact, farmers were
suspicious and have often

560
00:24:14,570 --> 00:24:16,510
tried to have them shut down.

561
00:24:16,510 --> 00:24:18,880
When farmers do use
futures exchanges,

562
00:24:18,880 --> 00:24:21,190
they almost always
buy the product.

563
00:24:21,190 --> 00:24:23,750
They don't sell it.

564
00:24:23,750 --> 00:24:26,340
So let's talk about what people
really use these things for.

565
00:24:26,340 --> 00:24:29,440
Here is the canonical
trade that you

566
00:24:29,440 --> 00:24:33,470
can think about, what you want
to understand futures markets.

567
00:24:33,470 --> 00:24:34,820
I'm a processor.

568
00:24:34,820 --> 00:24:36,530
All the people who
set these things up--

569
00:24:36,530 --> 00:24:38,780
and by the why, all the
people who set these things up

570
00:24:38,780 --> 00:24:39,930
were poker players.

571
00:24:39,930 --> 00:24:40,724
I'm not kidding.

572
00:24:40,724 --> 00:24:42,140
Look it up, you
find the name, you

573
00:24:42,140 --> 00:24:43,848
find all these people
were poker players.

574
00:24:46,170 --> 00:24:49,047
I grind wheat, OK?

575
00:24:49,047 --> 00:24:50,630
I'm not going to use
this for hedging.

576
00:24:50,630 --> 00:24:53,350
I can't use it for
hedging, right?

577
00:24:53,350 --> 00:24:55,660
I buy wheat, that's true.

578
00:24:55,660 --> 00:24:58,230
But is my exposure to
wheat going up in price

579
00:24:58,230 --> 00:25:00,830
or going down in price?

580
00:25:00,830 --> 00:25:02,017
One going up.

581
00:25:02,017 --> 00:25:03,350
OK, let me tell you two stories.

582
00:25:03,350 --> 00:25:06,317
Story number one,
there's a sudden increase

583
00:25:06,317 --> 00:25:07,150
in demand for wheat.

584
00:25:07,150 --> 00:25:10,380
There's a big war in
Europe, other crops

585
00:25:10,380 --> 00:25:11,780
fail in other regions.

586
00:25:11,780 --> 00:25:13,769
The price of wheat goes way up.

587
00:25:13,769 --> 00:25:14,935
What happens to my business?

588
00:25:18,107 --> 00:25:19,440
I'm making lots of money, right?

589
00:25:19,440 --> 00:25:20,780
They've got to
grind lots of wheat.

590
00:25:20,780 --> 00:25:22,260
They're bringing all the wheat
in from all the [INAUDIBLE].

591
00:25:22,260 --> 00:25:24,580
Everybody grinds it, there's a
shortage of grinding capacity,

592
00:25:24,580 --> 00:25:25,450
I can raise my prices.

593
00:25:25,450 --> 00:25:25,950
I'm rich.

594
00:25:25,950 --> 00:25:27,540
So it that way, I'm
long wheat, right?

595
00:25:27,540 --> 00:25:31,220
Price of wheat goes up,
my business goes up.

596
00:25:31,220 --> 00:25:32,230
Let's say-- sorry?

597
00:25:32,230 --> 00:25:34,140
AUDIENCE: So you're
assuming that the price

598
00:25:34,140 --> 00:25:37,260
of grounded wheat is directly
correlated to the price

599
00:25:37,260 --> 00:25:37,760
of wheat?

600
00:25:37,760 --> 00:25:38,460
PROFESSOR: Yes.

601
00:25:38,460 --> 00:25:41,530
I'm saying the price of
ground wheat is what went up.

602
00:25:41,530 --> 00:25:43,810
And because the price
of ground wheat went up,

603
00:25:43,810 --> 00:25:45,450
my business is more valuable.

604
00:25:45,450 --> 00:25:47,960
And you're exactly-- you
hit the point exactly,

605
00:25:47,960 --> 00:25:49,580
if that's the stuff I'm selling.

606
00:25:49,580 --> 00:25:51,240
Now let's do a different story.

607
00:25:51,240 --> 00:25:53,184
There's a crop
failure in the area.

608
00:25:53,184 --> 00:25:54,600
Price of wheat
goes way up, right?

609
00:25:54,600 --> 00:25:56,060
Wheat is scarce.

610
00:25:56,060 --> 00:25:57,460
Who wants my
grinding facilities?

611
00:25:57,460 --> 00:25:58,020
Nobody.

612
00:25:58,020 --> 00:25:59,728
There's an excess of
grinding facilities.

613
00:25:59,728 --> 00:26:01,220
I can't charge a penny.

614
00:26:01,220 --> 00:26:04,160
OK, so I have no
natural wheat exposure.

615
00:26:04,160 --> 00:26:07,380
I can't hedge my wheat exposure
in this futures market.

616
00:26:07,380 --> 00:26:09,620
Also, for the same reasons
I mentioned of a farmer,

617
00:26:09,620 --> 00:26:11,630
it's not a convenient
place to do it.

618
00:26:11,630 --> 00:26:13,660
It's a type and grade
of wheat I don't

619
00:26:13,660 --> 00:26:17,370
want at a place I don't want.

620
00:26:17,370 --> 00:26:19,620
Also, the price of
wheat has very little

621
00:26:19,620 --> 00:26:20,740
do with my business.

622
00:26:20,740 --> 00:26:25,795
What I care about is my
machinery operating properly,

623
00:26:25,795 --> 00:26:28,170
what's the price of fuel,
what's the price of labor, what

624
00:26:28,170 --> 00:26:29,836
are the regulations
on the stuff, what's

625
00:26:29,836 --> 00:26:31,800
the equality of the
stuff I'm getting.

626
00:26:31,800 --> 00:26:35,440
I can lock in prices with
suppliers and either buyers

627
00:26:35,440 --> 00:26:39,100
or the flour or sellers of
the wheat anytime I want.

628
00:26:39,100 --> 00:26:41,820
That's not the point
of the futures market.

629
00:26:41,820 --> 00:26:44,435
What you want to think
about is I'm growing wheat.

630
00:26:44,435 --> 00:26:46,240
I'm going to go to a
silo, a grain silo.

631
00:26:46,240 --> 00:26:48,870
A grain silo is a guy, he buys
wheat from all over the place

632
00:26:48,870 --> 00:26:51,024
and he sells it
to people like me.

633
00:26:51,024 --> 00:26:52,690
I'm going to say, OK,
I want these wheat

634
00:26:52,690 --> 00:26:55,360
deliveries over the
next three months,

635
00:26:55,360 --> 00:26:58,250
so much and so on
these various times.

636
00:26:58,250 --> 00:27:01,980
I want it delivered to
my grinding facility.

637
00:27:01,980 --> 00:27:06,660
I want exactly this
type and kind of wheat.

638
00:27:06,660 --> 00:27:09,810
And he'll agree, and
we'll settle a deal.

639
00:27:09,810 --> 00:27:13,060
Now I'm going to go to
the futures exchange.

640
00:27:13,060 --> 00:27:15,390
I've just bought a
quarter's worth of wheat

641
00:27:15,390 --> 00:27:16,484
from the wheat silo.

642
00:27:16,484 --> 00:27:18,150
I'm going to go to
the futures exchange,

643
00:27:18,150 --> 00:27:22,280
I'm going to sell a quarter's
worth of wheat forward.

644
00:27:22,280 --> 00:27:23,840
What have I done?

645
00:27:23,840 --> 00:27:26,550
Well, now I have no
price risk, right?

646
00:27:26,550 --> 00:27:28,560
Now if the price of
wheat goes up or down,

647
00:27:28,560 --> 00:27:30,461
I don't care, because
I bought we today,

648
00:27:30,461 --> 00:27:31,960
and I sold it three
months from now.

649
00:27:31,960 --> 00:27:34,672
I have borrowed wheat.

650
00:27:34,672 --> 00:27:35,880
Now, what could I do instead?

651
00:27:35,880 --> 00:27:36,760
I could borrow money.

652
00:27:36,760 --> 00:27:39,160
I could borrow money
and buy the wheat.

653
00:27:39,160 --> 00:27:41,050
But then I take
two price risks--

654
00:27:41,050 --> 00:27:43,559
I take the price risk of
the money, and remember,

655
00:27:43,559 --> 00:27:45,850
this is an area where there's
very little money around.

656
00:27:45,850 --> 00:27:47,070
These futures
exchanges were invented

657
00:27:47,070 --> 00:27:49,361
in a place where there was
very little gold and silver.

658
00:27:49,361 --> 00:27:51,570
There wasn't a good
banking system.

659
00:27:51,570 --> 00:27:53,830
Bank notes weren't
very trustworthy.

660
00:27:53,830 --> 00:27:56,570
So taking the risk of
money was a big risk.

661
00:27:56,570 --> 00:27:58,719
And also, price of
wheat going up and down.

662
00:27:58,719 --> 00:28:00,510
The simplest thing is
just to borrow wheat,

663
00:28:00,510 --> 00:28:02,490
which is what I want to do.

664
00:28:02,490 --> 00:28:06,140
And like any business loan,
I never intend to repay this.

665
00:28:06,140 --> 00:28:08,850
If I'm doing a business
loan, say to buy machinery,

666
00:28:08,850 --> 00:28:09,800
I make the loan.

667
00:28:09,800 --> 00:28:13,127
And when the loan comes
due, I borrow again

668
00:28:13,127 --> 00:28:13,960
to run the business.

669
00:28:13,960 --> 00:28:15,660
The only time I pay
back my business loans

670
00:28:15,660 --> 00:28:18,035
is when I shut down the business
and liquidate everything

671
00:28:18,035 --> 00:28:19,585
and pay off the creditors.

672
00:28:19,585 --> 00:28:20,460
Same thing with this.

673
00:28:20,460 --> 00:28:22,900
I'm going to roll these futures
contracts forward forever.

674
00:28:22,900 --> 00:28:25,100
I'm never going
to take delivery.

675
00:28:25,100 --> 00:28:27,930
But what I've done is I've
perpetually borrowed wheat.

676
00:28:27,930 --> 00:28:31,770
I've taken part of
my business input

677
00:28:31,770 --> 00:28:35,130
and I borrowed it
instead of buying it.

678
00:28:35,130 --> 00:28:38,160
So one thing is the
futures exchanges create

679
00:28:38,160 --> 00:28:40,454
a tremendous amount of credit.

680
00:28:40,454 --> 00:28:42,870
But they do something else too
that's kind of interesting.

681
00:28:42,870 --> 00:28:45,370
Anybody here know how to
take flour and turn it back

682
00:28:45,370 --> 00:28:45,885
into wheat?

683
00:28:49,600 --> 00:28:51,360
Anybody here know how
to take August wheat

684
00:28:51,360 --> 00:28:55,010
and move it back in time to May?

685
00:28:55,010 --> 00:28:58,000
All right, I have something
very surprising to tell you.

686
00:28:58,000 --> 00:29:01,570
For 175 years, the
Chicago Board of Trade

687
00:29:01,570 --> 00:29:05,030
here has been quoting prices
on both of those services.

688
00:29:05,030 --> 00:29:08,150
A futures exchange quotes
prices on services nobody's

689
00:29:08,150 --> 00:29:10,400
ever thought of.

690
00:29:10,400 --> 00:29:14,120
It opens tremendous
scope for innovation.

691
00:29:14,120 --> 00:29:15,834
Let's say I want
to build a bridge.

692
00:29:15,834 --> 00:29:17,250
And when I build
this bridge, it's

693
00:29:17,250 --> 00:29:19,839
going to divert wheat that
was going to Saint Louis.

694
00:29:19,839 --> 00:29:22,130
It's going to get diverted
to Chicago, because now it's

695
00:29:22,130 --> 00:29:24,600
going to be cheaper to
move it into Chicago.

696
00:29:24,600 --> 00:29:25,360
I can hedge that.

697
00:29:25,360 --> 00:29:29,120
I can sell those transportation
services on the futures market

698
00:29:29,120 --> 00:29:31,920
by buying Chicago wheat and
selling Saint Louis wheat.

699
00:29:34,920 --> 00:29:36,910
I can do calendar spreads.

700
00:29:36,910 --> 00:29:40,170
I can do grade spreads, cleaning
spreads, all of these things

701
00:29:40,170 --> 00:29:44,020
are a way of buying and selling
all the services involved

702
00:29:44,020 --> 00:29:50,370
in an agricultural
processing business.

703
00:29:50,370 --> 00:29:52,460
And this turns out to be
a far more efficient way

704
00:29:52,460 --> 00:29:53,300
to organize things.

705
00:29:53,300 --> 00:29:55,190
It's got its internally
generated credit.

706
00:29:55,190 --> 00:29:57,390
It's got far better
information flows.

707
00:29:57,390 --> 00:30:02,699
And this is what touches
off a tremendous explosion

708
00:30:02,699 --> 00:30:04,740
of business activity and
business innovation that

709
00:30:04,740 --> 00:30:07,470
goes throughout the world.

710
00:30:07,470 --> 00:30:10,210
Now, one of the things that's
kind of strange about futures

711
00:30:10,210 --> 00:30:12,817
markets is they were only used
for agricultural commodities.

712
00:30:12,817 --> 00:30:15,150
Now, granted, that was a much
bigger part of the economy

713
00:30:15,150 --> 00:30:17,560
than it is today, but
in the global economy,

714
00:30:17,560 --> 00:30:19,300
this was not a big deal.

715
00:30:19,300 --> 00:30:22,550
There were much, much more
valuable commodities that never

716
00:30:22,550 --> 00:30:24,250
went to futures exchanges.

717
00:30:24,250 --> 00:30:26,300
And there were things--
commodities weren't even

718
00:30:26,300 --> 00:30:29,640
the most valuable things.

719
00:30:29,640 --> 00:30:32,060
When things really took
off is in the 1970s

720
00:30:32,060 --> 00:30:36,970
when people took the same idea
and moved it to financial.

721
00:30:36,970 --> 00:30:43,394
But my story is about poker.

722
00:30:43,394 --> 00:30:44,810
One of the things
people sometimes

723
00:30:44,810 --> 00:30:48,410
say is that futures evolved
from to arrive contracts.

724
00:30:48,410 --> 00:30:51,110
Now, to arrive contracts
have been around longer

725
00:30:51,110 --> 00:30:52,750
than we have written records.

726
00:30:52,750 --> 00:30:54,970
In ancient Mesopotamia
in the early days,

727
00:30:54,970 --> 00:30:58,340
we see in the earliest writings
that we can still read today,

728
00:30:58,340 --> 00:31:02,140
we find that these to arrive
contracts were common.

729
00:31:02,140 --> 00:31:06,110
A to arrive contract
says, essentially,

730
00:31:06,110 --> 00:31:11,010
I will sell you 10,000 bushels
of wheat at $0.50 a bushel

731
00:31:11,010 --> 00:31:13,520
as soon as wheat
comes to the market,

732
00:31:13,520 --> 00:31:16,450
wheat come to the city market.

733
00:31:16,450 --> 00:31:17,660
OK, it's a price guarantee.

734
00:31:17,660 --> 00:31:18,910
It's not a delivery guarantee.

735
00:31:18,910 --> 00:31:20,610
I don't tell you when
you're going to get it.

736
00:31:20,610 --> 00:31:21,880
I don't even guarantee
you will get it.

737
00:31:21,880 --> 00:31:23,379
I'm just saying,
when it comes, this

738
00:31:23,379 --> 00:31:25,630
is what I will sell it you at.

739
00:31:25,630 --> 00:31:28,320
The largest to arrive
market in the United States

740
00:31:28,320 --> 00:31:30,980
was in Buffalo.

741
00:31:30,980 --> 00:31:35,140
OK, everybody remember all
those stories about the fortunes

742
00:31:35,140 --> 00:31:38,260
won and lost on the
Buffalo to arrive

743
00:31:38,260 --> 00:31:41,967
exchange, the
fistfights, the corners?

744
00:31:41,967 --> 00:31:44,050
We had people who made
their fortunes there, never

745
00:31:44,050 --> 00:31:45,424
went on do anything else?

746
00:31:45,424 --> 00:31:45,923
Exactly.

747
00:31:48,460 --> 00:31:53,040
To arrive contracts are run
by quiet commission clerks.

748
00:31:53,040 --> 00:31:57,530
Futures exchanges are populated
by tough, brawling innovators

749
00:31:57,530 --> 00:32:00,140
who often make fortunes
or lose fortunes and go on

750
00:32:00,140 --> 00:32:01,540
to do dramatic
business activity.

751
00:32:01,540 --> 00:32:04,530
There's no connection
between the two.

752
00:32:04,530 --> 00:32:08,642
Now, can anybody tell me which
ones of these are poker games?

753
00:32:08,642 --> 00:32:09,557
AUDIENCE: Omaha.

754
00:32:09,557 --> 00:32:10,265
PROFESSOR: Sorry?

755
00:32:10,265 --> 00:32:10,960
AUDIENCE: Omaha.

756
00:32:10,960 --> 00:32:11,910
PROFESSOR: Omaha, Texas.

757
00:32:11,910 --> 00:32:12,250
Yep.

758
00:32:12,250 --> 00:32:13,010
AUDIENCE: Chicago.

759
00:32:13,010 --> 00:32:14,567
PROFESSOR: Chicago, yes.

760
00:32:14,567 --> 00:32:16,650
This one you guys might
not have heard of so much,

761
00:32:16,650 --> 00:32:17,733
but there is a Cincinnati.

762
00:32:17,733 --> 00:32:20,670
It isn't played much anymore.

763
00:32:20,670 --> 00:32:23,130
There is no poker
game called Buffalo.

764
00:32:23,130 --> 00:32:27,760
There is no poker game named
after any place except places

765
00:32:27,760 --> 00:32:29,910
where, if you lose all
your money in the game,

766
00:32:29,910 --> 00:32:32,170
drown your servers by
jumping in a river,

767
00:32:32,170 --> 00:32:33,420
you float down to New Orleans.

768
00:32:37,390 --> 00:32:43,325
Even today, poker is very,
very strongly regionally-- it's

769
00:32:43,325 --> 00:32:44,820
a regional attitude.

770
00:32:44,820 --> 00:32:47,340
It's an extraordinarily
explosive innovative

771
00:32:47,340 --> 00:32:52,280
economic attitude, and it
has never really seeped out

772
00:32:52,280 --> 00:32:53,750
except the place it was born.

773
00:32:53,750 --> 00:32:57,600
Now, that may no longer be
true with internet poker.

774
00:32:57,600 --> 00:33:01,050
The question is, is the
soul of poker alive?

775
00:33:01,050 --> 00:33:05,070
Internet poker has this economic
innovation and freedom and self

776
00:33:05,070 --> 00:33:05,757
credit creation.

777
00:33:05,757 --> 00:33:08,340
Is this something's that's going
to spread to the whole world,

778
00:33:08,340 --> 00:33:10,350
or has somehow poker
been neutralized

779
00:33:10,350 --> 00:33:13,020
and, when it comes to a
computer and becomes virtual,

780
00:33:13,020 --> 00:33:14,515
it's no longer got that soul?

781
00:33:14,515 --> 00:33:18,540
It's something we're going to
find out in the next few years.

782
00:33:18,540 --> 00:33:21,130
Now we're going to
jump forward to me.

783
00:33:21,130 --> 00:33:23,810
I was born in the 1950s.

784
00:33:23,810 --> 00:33:27,111
I was raised in Seattle.

785
00:33:27,111 --> 00:33:28,610
And one thing you
have to understand

786
00:33:28,610 --> 00:33:32,150
is two people can be raised in
exactly the same time, exactly

787
00:33:32,150 --> 00:33:35,650
the same environment, and have
totally different ideas of what

788
00:33:35,650 --> 00:33:37,510
it was like.

789
00:33:37,510 --> 00:33:39,890
I think most people
would say, if a movie was

790
00:33:39,890 --> 00:33:41,640
made of my childhood,
they would say, hey,

791
00:33:41,640 --> 00:33:43,080
that was an idyllic childhood.

792
00:33:43,080 --> 00:33:44,467
Your dad was a professor.

793
00:33:44,467 --> 00:33:46,050
You didn't have so
much money that you

794
00:33:46,050 --> 00:33:49,675
had affluenza and were wrecking
cars or things like that.

795
00:33:49,675 --> 00:33:51,701
But you were never
embarrassed that you

796
00:33:51,701 --> 00:33:53,950
didn't have clothes for
school, you were never hungry,

797
00:33:53,950 --> 00:33:55,430
anything like that.

798
00:33:55,430 --> 00:33:56,350
You were treated well.

799
00:33:56,350 --> 00:33:57,630
It was a suburban neighborhood.

800
00:33:57,630 --> 00:33:58,546
It was a pretty place.

801
00:33:58,546 --> 00:34:00,690
You had lots of stimulation,
all of that stuff.

802
00:34:00,690 --> 00:34:03,780
But I hated it.

803
00:34:03,780 --> 00:34:07,020
I was oppressed
by lots of things.

804
00:34:07,020 --> 00:34:08,895
I believed, I
sincerely believed,

805
00:34:08,895 --> 00:34:10,880
that the world was going
to end in nuclear war

806
00:34:10,880 --> 00:34:12,480
before I was in college.

807
00:34:12,480 --> 00:34:15,428
It just seemed like it
clearly was likely to happen.

808
00:34:15,428 --> 00:34:16,969
I was interested in
math and science,

809
00:34:16,969 --> 00:34:20,050
but all the math and
science was defense related.

810
00:34:20,050 --> 00:34:22,150
Only big government
projects to kill

811
00:34:22,150 --> 00:34:26,860
people were the only way you
could get funding for things.

812
00:34:26,860 --> 00:34:32,070
More than half the world was in
the grip of brutal totalitarian

813
00:34:32,070 --> 00:34:36,370
dictatorships, and no country
had ever emerged from communism

814
00:34:36,370 --> 00:34:38,618
to freedom and prosperity.

815
00:34:38,618 --> 00:34:42,590
It seemed like the entire,
world even the free world, even

816
00:34:42,590 --> 00:34:45,460
the relative democracies,
were run by paranoids

817
00:34:45,460 --> 00:34:47,760
and total incompetents.

818
00:34:47,760 --> 00:34:49,170
The economy was terrible.

819
00:34:49,170 --> 00:34:51,659
Seattle was a few years ahead
of the rest of the country

820
00:34:51,659 --> 00:34:55,090
and we had sort of slipped
into that '70s malaise

821
00:34:55,090 --> 00:34:56,889
back in the '60s.

822
00:34:56,889 --> 00:34:59,420
A friend of the family who
was an aerospace engineer who

823
00:34:59,420 --> 00:35:02,190
was the world expert--
in fact, he went to MIT.

824
00:35:02,190 --> 00:35:05,460
He was the world expert in
materials for supersonic wing

825
00:35:05,460 --> 00:35:06,630
design.

826
00:35:06,630 --> 00:35:08,310
He was fired because
nobody wanted

827
00:35:08,310 --> 00:35:10,890
to build supersonic planes,
and he was driving a cab.

828
00:35:10,890 --> 00:35:13,327
Another thing about this
is this is, again, Seattle

829
00:35:13,327 --> 00:35:15,410
was kind of forward looking
in terms of economics.

830
00:35:15,410 --> 00:35:18,167
We were getting economic malaise
before the rest of the country.

831
00:35:18,167 --> 00:35:20,000
In another way, we were
kind of a throwback.

832
00:35:20,000 --> 00:35:24,230
It was more like the '50s than
other parts of the country.

833
00:35:24,230 --> 00:35:27,809
And it was this really
weird social dynamic.

834
00:35:27,809 --> 00:35:30,100
OK, I don't want to tell you
the neighborhood I grew up

835
00:35:30,100 --> 00:35:33,380
in was any worse or weirder
than any other neighborhood.

836
00:35:33,380 --> 00:35:36,020
But there was a certain
percentage of alcoholics,

837
00:35:36,020 --> 00:35:39,476
or child molesters,
of wife beaters,

838
00:35:39,476 --> 00:35:42,030
of drug addicts, all the stuff.

839
00:35:42,030 --> 00:35:47,004
And in the '50s and in Seattle
by the time I was growing up,

840
00:35:47,004 --> 00:35:47,920
nobody cared about it.

841
00:35:47,920 --> 00:35:50,210
Nobody would ever talk
about any of that stuff.

842
00:35:50,210 --> 00:35:54,540
If a man cut his grass and
brought home a paycheck,

843
00:35:54,540 --> 00:35:55,460
he was a good guy.

844
00:35:55,460 --> 00:35:59,280
He could do anything else and
nobody would talk about it.

845
00:35:59,280 --> 00:36:01,414
But if you didn't--
and we would have this.

846
00:36:01,414 --> 00:36:02,080
It would happen.

847
00:36:02,080 --> 00:36:04,926
Like a neighbor, the
guy would lose this job.

848
00:36:04,926 --> 00:36:07,050
They would quietly move
away, and nobody would ever

849
00:36:07,050 --> 00:36:08,860
talk about them.

850
00:36:08,860 --> 00:36:10,420
It was just weird.

851
00:36:10,420 --> 00:36:14,450
And you got the message, OK,
the economy was very insecure.

852
00:36:14,450 --> 00:36:16,616
If you could earn money,
everything was fine.

853
00:36:16,616 --> 00:36:18,490
You didn't have to worry
about anything else.

854
00:36:18,490 --> 00:36:23,020
But if you couldn't earn
money, it was unspeakably bad.

855
00:36:23,020 --> 00:36:24,340
Well, I was a shy kid.

856
00:36:24,340 --> 00:36:27,750
I was introverted, awkward.

857
00:36:27,750 --> 00:36:31,509
But I liked looking in the back
of a newspaper at the numbers.

858
00:36:31,509 --> 00:36:33,550
The patterns in the numbers
really fascinated me.

859
00:36:33,550 --> 00:36:37,285
And I worked out ways, and
I would bet money on horses,

860
00:36:37,285 --> 00:36:39,435
I would bet money
on other sports.

861
00:36:39,435 --> 00:36:42,051
And I found out I
could win doing this.

862
00:36:42,051 --> 00:36:44,550
I also found out-- and this was
true throughout the American

863
00:36:44,550 --> 00:36:45,600
West at the time.

864
00:36:45,600 --> 00:36:47,590
I couldn't really find
a good picture of this.

865
00:36:47,590 --> 00:36:49,798
This is just something I
found on the internet that's

866
00:36:49,798 --> 00:36:51,420
roughly equivalent.

867
00:36:51,420 --> 00:36:53,150
Taverns, in the back
room of the taverns

868
00:36:53,150 --> 00:36:56,400
or the basement of the taverns,
there were these poker games.

869
00:36:56,400 --> 00:37:01,360
And I'd go in and I'd
play, and I'd win.

870
00:37:01,360 --> 00:37:06,510
And more important than that
I would win, I could walk in.

871
00:37:06,510 --> 00:37:07,980
I could collect the money.

872
00:37:07,980 --> 00:37:14,000
I could walk out, and this was
enormously liberating to me.

873
00:37:14,000 --> 00:37:15,180
It said to me, OK.

874
00:37:15,180 --> 00:37:16,420
You don't have to get a job.

875
00:37:16,420 --> 00:37:18,540
You don't have to go to college.

876
00:37:18,540 --> 00:37:21,090
Anywhere you go in the world,
you can find a poker game.

877
00:37:21,090 --> 00:37:22,690
You can win money.

878
00:37:22,690 --> 00:37:25,204
And when you're a good
player and people know it,

879
00:37:25,204 --> 00:37:27,370
even if you run out of
money, people lend you money.

880
00:37:27,370 --> 00:37:29,882
People stake you.

881
00:37:29,882 --> 00:37:32,329
You also start getting
into this network.

882
00:37:32,329 --> 00:37:34,370
And this was something I
had not expected at all.

883
00:37:34,370 --> 00:37:35,390
I had gone there, I thought, OK.

884
00:37:35,390 --> 00:37:36,889
I'm going to win
some money, and I'm

885
00:37:36,889 --> 00:37:39,790
going to prove that I can
get this monkey off my back

886
00:37:39,790 --> 00:37:42,400
and I don't have to
worry about this anymore.

887
00:37:42,400 --> 00:37:44,240
These people-- the
people I was playing with

888
00:37:44,240 --> 00:37:44,760
didn't look like this.

889
00:37:44,760 --> 00:37:46,770
One or two of them might
have looked like this.

890
00:37:46,770 --> 00:37:48,770
But there were policemen,
there were sailors,

891
00:37:48,770 --> 00:37:49,580
there were clerks.

892
00:37:49,580 --> 00:37:50,760
You know, people.

893
00:37:50,760 --> 00:37:52,861
And they end up owing you money.

894
00:37:52,861 --> 00:37:54,610
Right, if you're good
player, these people

895
00:37:54,610 --> 00:37:56,580
end up owing you money.

896
00:37:56,580 --> 00:37:58,190
And I later kind of
figured, I sort of

897
00:37:58,190 --> 00:38:00,150
had a half idea of what
was going on at the time.

898
00:38:00,150 --> 00:38:02,066
But I've later figured
it out a little better,

899
00:38:02,066 --> 00:38:04,730
and later in life as
I've played more places,

900
00:38:04,730 --> 00:38:09,050
I've figured out the
system a little better.

901
00:38:09,050 --> 00:38:11,340
I had a purpose
for these people.

902
00:38:11,340 --> 00:38:13,660
I had two purposes.

903
00:38:13,660 --> 00:38:17,997
One is because I was a good
player I protected their game.

904
00:38:17,997 --> 00:38:20,080
Let's say somebody showed
up, a really good player

905
00:38:20,080 --> 00:38:21,480
wanted to take all
their money, show up

906
00:38:21,480 --> 00:38:23,300
and-- well, they had
somebody there who was good.

907
00:38:23,300 --> 00:38:25,591
And by the way, being a good
poker player in those days

908
00:38:25,591 --> 00:38:27,890
didn't just mean good card play.

909
00:38:27,890 --> 00:38:32,840
In fact, it would be trivially--
and I'm sure anybody here

910
00:38:32,840 --> 00:38:36,020
what have no trouble cleaning
up in terms of pure card play

911
00:38:36,020 --> 00:38:37,580
in this game.

912
00:38:37,580 --> 00:38:39,570
But you had to be
able to spot cheating.

913
00:38:39,570 --> 00:38:43,197
You had to be able to figure
out who might risk of arrest.

914
00:38:43,197 --> 00:38:45,030
You had to figure out
who might get violent.

915
00:38:45,030 --> 00:38:48,120
I mean, there's a lot of
social skills involved in this.

916
00:38:48,120 --> 00:38:51,670
So by being a good player,
you protected the game,

917
00:38:51,670 --> 00:38:55,340
but you also connected
them with a bigger network.

918
00:38:55,340 --> 00:38:57,675
So remember, a lot of this
is about credit equation.

919
00:38:57,675 --> 00:39:00,700
A tremendous amount of
economic activity goes on here.

920
00:39:03,660 --> 00:39:07,560
There's doctors, lawyers,
police, mechanics,

921
00:39:07,560 --> 00:39:12,660
whatever-- people exchanging
services, underground economy,

922
00:39:12,660 --> 00:39:15,380
people who couldn't make
it in the normal economy.

923
00:39:15,380 --> 00:39:18,920
Like let's say you're a lawyer,
and you're a really bad lawyer.

924
00:39:18,920 --> 00:39:20,300
And you can't get any business.

925
00:39:20,300 --> 00:39:21,630
You hang [? out a shingle, ?]
nobody's going to hire you.

926
00:39:21,630 --> 00:39:22,796
Your resume isn't very good.

927
00:39:22,796 --> 00:39:24,290
There's too many lawyers around.

928
00:39:24,290 --> 00:39:27,956
But you know, you owe
somebody money at a poker game

929
00:39:27,956 --> 00:39:30,330
and they want you to write a
letter and do some for them,

930
00:39:30,330 --> 00:39:33,840
whenever, you can do a little
legal business on this stuff.

931
00:39:33,840 --> 00:39:38,180
And by connecting into the
broader network in the city,

932
00:39:38,180 --> 00:39:40,150
you connect these people in.

933
00:39:40,150 --> 00:39:43,260
Some of these people had really
dropped out of normal life,

934
00:39:43,260 --> 00:39:45,686
or they weren't
getting paychecks.

935
00:39:45,686 --> 00:39:48,060
They were subsisting entirely
on the underground economy.

936
00:39:48,060 --> 00:39:50,143
And this was a very important
organizational tool.

937
00:39:50,143 --> 00:39:51,620
Other people like
to keep one foot

938
00:39:51,620 --> 00:39:54,630
in that world-- maybe a
little side income, maybe

939
00:39:54,630 --> 00:39:55,380
a little fallback.

940
00:39:58,060 --> 00:40:00,170
We weren't doing like
big organized crime,

941
00:40:00,170 --> 00:40:01,980
but there'd be a
sailor in the game who

942
00:40:01,980 --> 00:40:03,884
could bring in Cuban cigars.

943
00:40:03,884 --> 00:40:05,550
There was a guy who
was maybe a bathroom

944
00:40:05,550 --> 00:40:07,990
attendant at a fancy
restaurant who could sell them,

945
00:40:07,990 --> 00:40:12,570
and this kind of stuff could get
organized in a game like this.

946
00:40:12,570 --> 00:40:15,970
The poker was very important
because you actually

947
00:40:15,970 --> 00:40:17,910
spend a lot of time
with these people.

948
00:40:17,910 --> 00:40:19,540
You learned a lot about them.

949
00:40:19,540 --> 00:40:21,880
You couldn't fake it in a way.

950
00:40:21,880 --> 00:40:24,807
An undercover cop could
show up for two days

951
00:40:24,807 --> 00:40:26,390
or act something
this, but they aren't

952
00:40:26,390 --> 00:40:30,130
going to be playing poker
every day for years.

953
00:40:30,130 --> 00:40:35,900
So I'm kind of moving up in
the Seattle poker network,

954
00:40:35,900 --> 00:40:37,070
and I come to Boston.

955
00:40:37,070 --> 00:40:39,330
I went to Harvard.

956
00:40:39,330 --> 00:40:41,700
And again, remember, I'm shy.

957
00:40:41,700 --> 00:40:42,520
I'm awkward.

958
00:40:42,520 --> 00:40:48,460
I'm from the west, a little
overwhelmed by all this stuff.

959
00:40:48,460 --> 00:40:50,580
But I walked in with a network.

960
00:40:50,580 --> 00:40:53,170
It shocked me when I got
here that this network was

961
00:40:53,170 --> 00:40:59,210
seamlessly translated across
the country, that I knew police,

962
00:40:59,210 --> 00:41:05,410
I knew poker people of all
different ranks and stations

963
00:41:05,410 --> 00:41:07,390
of life.

964
00:41:07,390 --> 00:41:10,750
I got into poker games
at Harvard itself.

965
00:41:10,750 --> 00:41:13,495
People talk about going to
college to get contacts.

966
00:41:13,495 --> 00:41:14,620
Let me tell you about that.

967
00:41:14,620 --> 00:41:15,600
I had three roommates.

968
00:41:15,600 --> 00:41:16,220
I love my roommates.

969
00:41:16,220 --> 00:41:17,010
These are great guys.

970
00:41:17,010 --> 00:41:18,680
I'm not saying anything
bad about them.

971
00:41:18,680 --> 00:41:23,170
But in terms of like useful
contacts for me in life,

972
00:41:23,170 --> 00:41:25,420
well, one of them's a
corporate lawyer, one of them's

973
00:41:25,420 --> 00:41:27,620
a TV producer, one of
them's a law professor--

974
00:41:27,620 --> 00:41:29,060
all great things, that's nice.

975
00:41:29,060 --> 00:41:31,000
Never really a lot
of use to me in terms

976
00:41:31,000 --> 00:41:34,580
of advancing my business
interests or whatever,

977
00:41:34,580 --> 00:41:37,611
and not exactly hard things
to break into, right?

978
00:41:37,611 --> 00:41:39,110
You want to know a
corporate lawyer?

979
00:41:39,110 --> 00:41:42,970
Well, it's pretty easy to
know a corporate lawyer.

980
00:41:42,970 --> 00:41:46,344
Poker games at Harvard, I
played with George W. Bush,

981
00:41:46,344 --> 00:41:47,510
who went on to be president.

982
00:41:47,510 --> 00:41:51,710
I played with Bill Gates,
Steve Ballmer, Scott Turow,

983
00:41:51,710 --> 00:41:55,987
people who are celebrities,
politicians, rich people.

984
00:41:55,987 --> 00:41:57,320
Those are the poker connections.

985
00:41:57,320 --> 00:41:59,550
And a poker connection
is very different.

986
00:41:59,550 --> 00:42:01,660
You're not playing
poker with your friends.

987
00:42:01,660 --> 00:42:03,640
A poker connection is,
there is a business

988
00:42:03,640 --> 00:42:06,484
relationship in there that
can be extremely useful.

989
00:42:06,484 --> 00:42:08,150
My whole life, my
whole career, has been

990
00:42:08,150 --> 00:42:12,460
informed by poker networks.

991
00:42:12,460 --> 00:42:16,450
Now I'm going to zip
through a few things.

992
00:42:16,450 --> 00:42:19,250
I'm playing in Boston,
a guy shows up.

993
00:42:19,250 --> 00:42:22,220
He actually managed a card
room near Stanford University.

994
00:42:22,220 --> 00:42:25,040
He was, again, it's
this network thing.

995
00:42:25,040 --> 00:42:27,720
So I'm playing now in a
pretty senior game in Boston,

996
00:42:27,720 --> 00:42:29,220
some the best card
players in Boston

997
00:42:29,220 --> 00:42:32,640
are here, pretty high stakes.

998
00:42:32,640 --> 00:42:36,350
And they invite visiting pros
from other parts of the country

999
00:42:36,350 --> 00:42:40,800
to keep the network connected
throughout the country.

1000
00:42:40,800 --> 00:42:45,310
And this guy said to me,
he said, well, I was good.

1001
00:42:45,310 --> 00:42:46,770
I played well that night.

1002
00:42:46,770 --> 00:42:47,790
But it wasn't just that.

1003
00:42:47,790 --> 00:42:50,320
He said, you know, you're
a kind of strange guy.

1004
00:42:50,320 --> 00:42:52,890
You've got this sort of
mathematical poker sense.

1005
00:42:52,890 --> 00:42:55,460
You think about it in
theoretical terms, whatever.

1006
00:42:55,460 --> 00:42:58,130
There are a lot of guys like
you out in Gardena, California.

1007
00:42:58,130 --> 00:43:02,040
So that's where the best poker
in the world is being played.

1008
00:43:02,040 --> 00:43:03,610
He said, I'm a good player.

1009
00:43:03,610 --> 00:43:05,320
I'm a national pro.

1010
00:43:05,320 --> 00:43:07,580
I go around from city to
city sitting in end games

1011
00:43:07,580 --> 00:43:08,996
with the best
players in the city.

1012
00:43:08,996 --> 00:43:12,890
And I win in those games, but I
can't turn a profit in Gardena.

1013
00:43:12,890 --> 00:43:15,720
You should go the Gardena and
see if you can match yourself

1014
00:43:15,720 --> 00:43:18,480
up with the best.

1015
00:43:18,480 --> 00:43:19,730
So I go there.

1016
00:43:19,730 --> 00:43:22,520
How many people have heard
of Gardena, California?

1017
00:43:22,520 --> 00:43:23,400
Yeah.

1018
00:43:23,400 --> 00:43:26,290
If you're interested, there's
a movie called California Split

1019
00:43:26,290 --> 00:43:27,560
that's got some good scenes.

1020
00:43:27,560 --> 00:43:29,510
It's stupid poker movie
for the most part,

1021
00:43:29,510 --> 00:43:33,380
but it has some actual scenes
shot in Gardena at that time.

1022
00:43:33,380 --> 00:43:35,910
That was the best
poker in the world.

1023
00:43:35,910 --> 00:43:41,090
And it was the network theory
I was talking about on steroids

1024
00:43:41,090 --> 00:43:42,570
because of a few things.

1025
00:43:42,570 --> 00:43:44,969
First of all, this
is in the late '70s.

1026
00:43:44,969 --> 00:43:46,760
Marginal tax rates have
gotten really high,

1027
00:43:46,760 --> 00:43:48,820
regulation has gotten
crazy, the tax code

1028
00:43:48,820 --> 00:43:51,320
is incredibly
complicated and corrupt.

1029
00:43:51,320 --> 00:43:53,840
Community property, big
thing-- a lot of these guys

1030
00:43:53,840 --> 00:43:55,007
were wiped out in a divorce.

1031
00:43:55,007 --> 00:43:56,506
I mean, that was
something that just

1032
00:43:56,506 --> 00:43:58,220
didn't happen 10 years earlier.

1033
00:43:58,220 --> 00:43:59,792
A lot of them had tax liens.

1034
00:43:59,792 --> 00:44:02,250
So you have this whole group
of people, they tend be-- they

1035
00:44:02,250 --> 00:44:04,860
were much better
educated than the guys

1036
00:44:04,860 --> 00:44:09,210
I was playing with in Seattle or
even really the guys in Boston.

1037
00:44:09,210 --> 00:44:10,570
They were smart.

1038
00:44:10,570 --> 00:44:13,594
Not only were they broke,
they were financially toxic.

1039
00:44:13,594 --> 00:44:15,260
Any money they put
in a bank was getting

1040
00:44:15,260 --> 00:44:16,800
whisked away by somebody.

1041
00:44:16,800 --> 00:44:19,500
If they were walking down the
street with $1 in their pocket,

1042
00:44:19,500 --> 00:44:21,170
somebody could grab it.

1043
00:44:21,170 --> 00:44:24,060
Poker chip, not so much, right?

1044
00:44:24,060 --> 00:44:27,540
Poker debt, they lent some money
to somebody in the poker room,

1045
00:44:27,540 --> 00:44:29,530
nobody could collect that.

1046
00:44:29,530 --> 00:44:34,400
Tremendous about of very active
underground economy going on.

1047
00:44:34,400 --> 00:44:36,850
I go there, and first day I'm
there, guy comes up to me.

1048
00:44:36,850 --> 00:44:38,310
He manages a motel.

1049
00:44:38,310 --> 00:44:40,907
He used to own
it, went bankrupt.

1050
00:44:40,907 --> 00:44:42,365
Now the bank pays
him to manage it.

1051
00:44:45,890 --> 00:44:48,744
If you're a poker player, he'll
give you a room to stay in.

1052
00:44:48,744 --> 00:44:49,410
You have to pay.

1053
00:44:49,410 --> 00:44:50,990
You slip him a
little bit of money,

1054
00:44:50,990 --> 00:44:52,792
much less than
the rent would be.

1055
00:44:52,792 --> 00:44:55,250
It's kind of furnished with
broken down stuff other tenants

1056
00:44:55,250 --> 00:44:55,780
have left.

1057
00:44:55,780 --> 00:44:57,160
But poker players
don't care, right?

1058
00:44:57,160 --> 00:44:58,260
Poker players are
there, they go,

1059
00:44:58,260 --> 00:45:00,620
they sleep on the broken
couch, and then they leave.

1060
00:45:00,620 --> 00:45:04,180
Maybe take a shower if
it's the first of the month

1061
00:45:04,180 --> 00:45:06,920
or something.

1062
00:45:06,920 --> 00:45:08,860
And you'd stay there for
three or four months,

1063
00:45:08,860 --> 00:45:11,820
and eventually the owners
would kick you out.

1064
00:45:11,820 --> 00:45:14,540
And he'd just say, oh, well,
the guy never paid any rent,

1065
00:45:14,540 --> 00:45:16,559
and he would cover all
this for you and do it.

1066
00:45:16,559 --> 00:45:18,850
And then you just move to
the next motel down the line,

1067
00:45:18,850 --> 00:45:20,505
and he moves somebody else in.

1068
00:45:20,505 --> 00:45:21,880
You wanted to get
your car fixed,

1069
00:45:21,880 --> 00:45:24,250
you wanted to get
a lawsuit filed,

1070
00:45:24,250 --> 00:45:28,260
you wanted to get
your operation done,

1071
00:45:28,260 --> 00:45:30,820
whatever, there were people
in the room to do it,

1072
00:45:30,820 --> 00:45:34,070
all for under the table,
you could borrow the money.

1073
00:45:34,070 --> 00:45:37,560
And all of the people who can
invented the modern poker,

1074
00:45:37,560 --> 00:45:40,210
if you talk about the David
Sklansky's, Mason Malmuth, Mike

1075
00:45:40,210 --> 00:45:40,710
Harrow.

1076
00:45:40,710 --> 00:45:42,600
I don't know if these
names mean anything to you,

1077
00:45:42,600 --> 00:45:44,900
but these were the first people
who actually sat down and wrote

1078
00:45:44,900 --> 00:45:45,795
poker theory books.

1079
00:45:45,795 --> 00:45:47,940
This was the only place
where people were really

1080
00:45:47,940 --> 00:45:48,970
thinking about it.

1081
00:45:48,970 --> 00:45:51,100
Las Vegas, they hated poker.

1082
00:45:51,100 --> 00:45:52,930
Casinos hate poker.

1083
00:45:52,930 --> 00:45:55,490
The reason casinos hated poker
is somebody in the building

1084
00:45:55,490 --> 00:45:58,724
was losing money and the
Casino wasn't getting it.

1085
00:45:58,724 --> 00:46:01,140
And they would stick it-- they
either wouldn't have poker,

1086
00:46:01,140 --> 00:46:03,080
or they'd stick it next to
the layout of slot machines

1087
00:46:03,080 --> 00:46:03,970
under the stairs.

1088
00:46:03,970 --> 00:46:06,140
They'd open and close the
room at random intervals.

1089
00:46:06,140 --> 00:46:08,348
The one thing they did was
the World Series of Poker.

1090
00:46:08,348 --> 00:46:09,950
It was a pure Casino
publicity stunt.

1091
00:46:09,950 --> 00:46:13,580
It had nothing to do
with poker in those days.

1092
00:46:13,580 --> 00:46:16,290
Only in like the late
'90s, early 2000s

1093
00:46:16,290 --> 00:46:17,790
with lots of people
being brought in

1094
00:46:17,790 --> 00:46:20,120
by internet, with
the poker boom,

1095
00:46:20,120 --> 00:46:23,040
with television did casinos
really come to terms with it

1096
00:46:23,040 --> 00:46:24,940
and start liking poker.

1097
00:46:24,940 --> 00:46:27,130
But Gardena was pure
poker, and that's

1098
00:46:27,130 --> 00:46:31,060
where the good stuff was done.

1099
00:46:31,060 --> 00:46:34,650
Now, I'm making my
living by poker.

1100
00:46:34,650 --> 00:46:40,730
But I have broader interests.

1101
00:46:40,730 --> 00:46:44,150
I'm thinking-- I was really,
when I came to Boston for four

1102
00:46:44,150 --> 00:46:49,970
years, I was shocked at
how shoddy I felt that most

1103
00:46:49,970 --> 00:46:51,160
quantitative analysis was.

1104
00:46:51,160 --> 00:46:53,624
I thought, people
are doing this work.

1105
00:46:53,624 --> 00:46:54,790
They're teaching this stuff.

1106
00:46:54,790 --> 00:46:55,840
They're advising the government.

1107
00:46:55,840 --> 00:46:56,840
They're running the government.

1108
00:46:56,840 --> 00:46:58,673
They're writing these
papers, this and that.

1109
00:46:58,673 --> 00:47:01,230
They have terrible data.

1110
00:47:01,230 --> 00:47:02,670
They have really
stupid analysis.

1111
00:47:02,670 --> 00:47:05,030
And the biggest thing, the
way I kind of encapsulated

1112
00:47:05,030 --> 00:47:06,820
all of this is, none
of them would bet

1113
00:47:06,820 --> 00:47:09,780
a nickel on their own results.

1114
00:47:09,780 --> 00:47:12,570
Every single one of them,
if they were buying a car,

1115
00:47:12,570 --> 00:47:15,320
they would spend a lot more
serious commonsense analysis

1116
00:47:15,320 --> 00:47:17,790
to get the right car
than they do recommending

1117
00:47:17,790 --> 00:47:21,260
a plan for the government to
take over the steel industry,

1118
00:47:21,260 --> 00:47:24,240
or something like that.

1119
00:47:24,240 --> 00:47:27,360
And a lot of other
people felt the same way.

1120
00:47:27,360 --> 00:47:29,260
And we had both
some philosophical

1121
00:47:29,260 --> 00:47:33,280
and some empirical
ideas that we were

1122
00:47:33,280 --> 00:47:36,050
sold on the idea of
quantitative analysis.

1123
00:47:36,050 --> 00:47:38,962
We were confident in our
ability to make bets and win.

1124
00:47:38,962 --> 00:47:41,170
One of the things about
hanging around with gamblers,

1125
00:47:41,170 --> 00:47:42,086
there's a lot of bets.

1126
00:47:42,086 --> 00:47:45,400
Gamblers are really
nasty people,

1127
00:47:45,400 --> 00:47:47,470
a lot of really bad stuff.

1128
00:47:47,470 --> 00:47:48,970
One of the flip
sides of that is you

1129
00:47:48,970 --> 00:47:52,950
don't have to be nice, which
takes a lot of pressure off.

1130
00:47:52,950 --> 00:47:58,470
But they do take things
seriously, right?

1131
00:47:58,470 --> 00:48:03,050
Anything you say, somebody
can say, put some money on it.

1132
00:48:03,050 --> 00:48:07,740
If you won't, you're just
an idiot loser chattering.

1133
00:48:07,740 --> 00:48:10,105
You'd start really thinking
about things if you actually

1134
00:48:10,105 --> 00:48:13,900
have to bet money on
anything, any opinion you get.

1135
00:48:13,900 --> 00:48:16,000
A lot of silly
chattering conversation

1136
00:48:16,000 --> 00:48:21,230
never happens if people have
to bet on everything they say.

1137
00:48:21,230 --> 00:48:24,584
Anyway though, the natural
thing to do is to say,

1138
00:48:24,584 --> 00:48:25,750
OK, I want to go to a place.

1139
00:48:25,750 --> 00:48:28,654
I want to prove that
my methods work.

1140
00:48:28,654 --> 00:48:30,570
And the way I'm going
to prove my methods work

1141
00:48:30,570 --> 00:48:32,611
is I'm going to go to
places where people gamble,

1142
00:48:32,611 --> 00:48:34,742
and I'm going to
prove that I can win.

1143
00:48:34,742 --> 00:48:37,415
Now, all of us had read Ed
Thorpe's Beat the Dealer.

1144
00:48:37,415 --> 00:48:39,876
Do people here know Ed Thorpe?

1145
00:48:39,876 --> 00:48:40,500
OK, you should.

1146
00:48:40,500 --> 00:48:41,877
You should read his books.

1147
00:48:41,877 --> 00:48:42,710
You should meet him.

1148
00:48:42,710 --> 00:48:44,700
He's still alive.

1149
00:48:44,700 --> 00:48:47,280
He was a mathematics professor.

1150
00:48:47,280 --> 00:48:48,870
He invented blackjack
card counting.

1151
00:48:48,870 --> 00:48:52,350
He managed to beat virtually
every other Casino game.

1152
00:48:52,350 --> 00:48:56,972
And he's also either invented
or perfected almost all

1153
00:48:56,972 --> 00:48:58,680
of the quantitative
hedge fund strategies

1154
00:48:58,680 --> 00:48:59,690
that people use today.

1155
00:48:59,690 --> 00:49:02,910
He was one of the most
successful hedge fund managers

1156
00:49:02,910 --> 00:49:05,110
for many years.

1157
00:49:05,110 --> 00:49:09,279
So one thing we did is we wanted
to go and beat casino games.

1158
00:49:09,279 --> 00:49:10,820
And then what I'd
like to talk about,

1159
00:49:10,820 --> 00:49:12,653
I'm just going to mention
this very briefly.

1160
00:49:12,653 --> 00:49:15,874
But roulette, to
me, was the one that

1161
00:49:15,874 --> 00:49:18,040
really changed the way I
think about a lot of stuff.

1162
00:49:18,040 --> 00:49:19,600
It's a very, very
important lesson

1163
00:49:19,600 --> 00:49:23,360
for people who have academic
statistics backgrounds.

1164
00:49:23,360 --> 00:49:25,140
How do you beat roulette?

1165
00:49:25,140 --> 00:49:27,550
OK, well this Ed Thorpe's.

1166
00:49:27,550 --> 00:49:29,510
Ed Thorpe was
thinking about this.

1167
00:49:29,510 --> 00:49:32,950
And he was hearing this
debate, and some people said,

1168
00:49:32,950 --> 00:49:34,640
you should [INAUDIBLE]
You should just

1169
00:49:34,640 --> 00:49:36,140
record the patterns
of the wheels

1170
00:49:36,140 --> 00:49:37,830
and see if you can notice
patterns, like the wheel's

1171
00:49:37,830 --> 00:49:39,480
a little weighted,
what number comes up

1172
00:49:39,480 --> 00:49:40,890
a little more than the others.

1173
00:49:40,890 --> 00:49:43,500
But other people said
no, that's impossible.

1174
00:49:43,500 --> 00:49:45,340
The wheels are too good.

1175
00:49:45,340 --> 00:49:48,060
And Ed had a really remarkable
insight that not enough people

1176
00:49:48,060 --> 00:49:48,700
know about.

1177
00:49:48,700 --> 00:49:51,980
He said, you can win
money either way.

1178
00:49:51,980 --> 00:49:55,500
If the wheel's broken and
13 comes up a little more

1179
00:49:55,500 --> 00:49:57,280
than it should,
you can bet on 13.

1180
00:49:57,280 --> 00:49:58,890
That's easy.

1181
00:49:58,890 --> 00:50:02,130
But if the wheel is so perfect
that every number comes

1182
00:50:02,130 --> 00:50:04,764
up equally often, it must
be machined to perfection,

1183
00:50:04,764 --> 00:50:06,180
then you can use
a little physics.

1184
00:50:06,180 --> 00:50:09,610
We had some mechanics up on
the board when I came here.

1185
00:50:09,610 --> 00:50:13,230
Use Newtonian physics, and
you can figure out where

1186
00:50:13,230 --> 00:50:15,920
the ball is going to end up.

1187
00:50:15,920 --> 00:50:17,130
So it's a lot of work.

1188
00:50:17,130 --> 00:50:18,390
He did it with Claude Shannon.

1189
00:50:18,390 --> 00:50:22,315
Again, we're back to
MIT, one of the fathers

1190
00:50:22,315 --> 00:50:23,900
of information theory.

1191
00:50:23,900 --> 00:50:26,540
And they sat down, and
they worked on roulette.

1192
00:50:26,540 --> 00:50:28,510
And if you study this
problem for a bit,

1193
00:50:28,510 --> 00:50:33,020
you pretty quickly find
out, here's how things work.

1194
00:50:33,020 --> 00:50:35,570
The way roulette works, they
spin a wheel in one direction,

1195
00:50:35,570 --> 00:50:37,290
and they spin a ball
around the outside

1196
00:50:37,290 --> 00:50:39,420
of a bowl the other way.

1197
00:50:39,420 --> 00:50:45,440
OK, everything is very Newtonian
until the ball goes away

1198
00:50:45,440 --> 00:50:46,610
from the edge.

1199
00:50:46,610 --> 00:50:49,557
It is very easy with a little
bit of electronic aids--

1200
00:50:49,557 --> 00:50:51,640
which at the time were
legal, and are now illegal.

1201
00:50:51,640 --> 00:50:55,130
But with electronic
aids, it's very easy

1202
00:50:55,130 --> 00:50:58,350
to tell what number
will be under the ball

1203
00:50:58,350 --> 00:51:01,040
when the ball leaves the edge.

1204
00:51:01,040 --> 00:51:03,220
Now, there's a lot of
bouncing and banging

1205
00:51:03,220 --> 00:51:06,610
around between that and
when the ball comes to rest.

1206
00:51:06,610 --> 00:51:08,480
And that's pretty
chaotic, essentially

1207
00:51:08,480 --> 00:51:10,700
impossible to predict.

1208
00:51:10,700 --> 00:51:13,550
So you have this perfectly
predictable section,

1209
00:51:13,550 --> 00:51:15,940
and then you have
this chaotic section.

1210
00:51:15,940 --> 00:51:18,740
But here's the insight.

1211
00:51:18,740 --> 00:51:21,050
The predictable section,
you can calculate.

1212
00:51:21,050 --> 00:51:21,800
You can know, OK.

1213
00:51:21,800 --> 00:51:23,591
You say, when the ball
goes under the edge,

1214
00:51:23,591 --> 00:51:26,340
number 17 will be
directly underneath it.

1215
00:51:26,340 --> 00:51:30,224
The chaotic part cannot
be uniform on the wheel.

1216
00:51:30,224 --> 00:51:33,560
You can say, if 17 is under
it when the ball comes down,

1217
00:51:33,560 --> 00:51:35,132
here is the
distribution of places

1218
00:51:35,132 --> 00:51:36,840
the ball is going to
end up on the wheel,

1219
00:51:36,840 --> 00:51:40,250
and it's nowhere near
random, nowhere near uniform.

1220
00:51:40,250 --> 00:51:42,290
So you can make good bets.

1221
00:51:42,290 --> 00:51:44,279
Now if you actually
want to do this,

1222
00:51:44,279 --> 00:51:45,570
you have to get several layers.

1223
00:51:45,570 --> 00:51:49,400
You have to keep
refining this notion.

1224
00:51:49,400 --> 00:51:53,190
But I just want to focus
on the big picture.

1225
00:51:53,190 --> 00:51:55,820
A lot of statistical theory,
the basic theory of statistics,

1226
00:51:55,820 --> 00:51:57,130
was based on dice.

1227
00:51:57,130 --> 00:52:00,620
That's what Nassim Taleb calls
the ludic fallacy-- people

1228
00:52:00,620 --> 00:52:03,160
trying to create randomness.

1229
00:52:03,160 --> 00:52:07,020
The real world is
nowhere near so random.

1230
00:52:07,020 --> 00:52:10,860
Even when people try to create
randomness, even in a Casino,

1231
00:52:10,860 --> 00:52:12,930
they can't do it.

1232
00:52:12,930 --> 00:52:16,620
And the reason they can't do it
is if you build things really,

1233
00:52:16,620 --> 00:52:19,600
really precisely,
they're predictable.

1234
00:52:19,600 --> 00:52:22,470
If you build things kind
of loose and sloppy,

1235
00:52:22,470 --> 00:52:25,690
they have non-uniform patterns.

1236
00:52:25,690 --> 00:52:28,960
What you can't do is build
a device that's both.

1237
00:52:28,960 --> 00:52:31,680
It exceeds human capabilities.

1238
00:52:31,680 --> 00:52:34,480
And when we're talking about
the practical randomness

1239
00:52:34,480 --> 00:52:39,720
you see in the world-- in the
stock market, in politics,

1240
00:52:39,720 --> 00:52:42,840
and in war, anything you
want to talk about-- people

1241
00:52:42,840 --> 00:52:46,070
are way too sloppy in
modeling things as random.

1242
00:52:46,070 --> 00:52:48,800
Whenever somebody says
this thing is random,

1243
00:52:48,800 --> 00:52:50,950
you say, I'm going
to take a hard block.

1244
00:52:50,950 --> 00:52:53,420
And I'm going to find little
pockets of predictability

1245
00:52:53,420 --> 00:52:55,270
that I can calculate.

1246
00:52:55,270 --> 00:52:57,370
And in between those
pockets of predictability,

1247
00:52:57,370 --> 00:53:01,101
I'm going to find patterns
that are non-uniform.

1248
00:53:01,101 --> 00:53:02,600
And what I'm going
to end up with is

1249
00:53:02,600 --> 00:53:05,016
I'm going to end up with a
system where people are saying,

1250
00:53:05,016 --> 00:53:08,224
you know, you're obsessing
about data and data quality

1251
00:53:08,224 --> 00:53:10,140
for things that don't
really matter very much.

1252
00:53:10,140 --> 00:53:12,223
Nobody else thinks these
statistics are important.

1253
00:53:12,223 --> 00:53:14,220
Why are you spending
all your time

1254
00:53:14,220 --> 00:53:15,650
cleaning data for
something that's

1255
00:53:15,650 --> 00:53:19,440
far removed from the essential
economics of this problem?

1256
00:53:19,440 --> 00:53:21,260
And they're also going
to say, and here are

1257
00:53:21,260 --> 00:53:22,990
the really important things.

1258
00:53:22,990 --> 00:53:24,670
And you're just
waving your hands.

1259
00:53:24,670 --> 00:53:25,836
You're not paying attention.

1260
00:53:25,836 --> 00:53:28,610
You're making criminally
reckless or crude assumptions

1261
00:53:28,610 --> 00:53:30,196
about those things.

1262
00:53:30,196 --> 00:53:31,570
But what they
don't understand is

1263
00:53:31,570 --> 00:53:34,180
that's exactly how you beat it.

1264
00:53:34,180 --> 00:53:35,470
That is what you do.

1265
00:53:35,470 --> 00:53:37,720
When you figure this stuff
out, you really come up

1266
00:53:37,720 --> 00:53:42,390
with this thing that will
understand and make a profit,

1267
00:53:42,390 --> 00:53:44,340
it will look like
that to outsiders,

1268
00:53:44,340 --> 00:53:46,340
that you're focused on
stuff that doesn't matter

1269
00:53:46,340 --> 00:53:48,510
and you're ignoring the
stuff that does matter.

1270
00:53:48,510 --> 00:53:50,310
Put another way,
the stuff you think

1271
00:53:50,310 --> 00:53:52,710
that matters doesn't,
and the stuff you

1272
00:53:52,710 --> 00:53:54,160
don't think that matters does.

1273
00:53:54,160 --> 00:53:56,243
And when you do enough
work on this kind of stuff,

1274
00:53:56,243 --> 00:53:58,550
that's how you win.

1275
00:53:58,550 --> 00:54:00,520
Now, the thing
about the people who

1276
00:54:00,520 --> 00:54:04,320
did blackjack card counting and
roulette and baccarat and craps

1277
00:54:04,320 --> 00:54:07,600
worked on all those
other games, what

1278
00:54:07,600 --> 00:54:13,200
happens when people find out
that's what they're doing?

1279
00:54:13,200 --> 00:54:14,480
AUDIENCE: [INAUDIBLE]

1280
00:54:14,480 --> 00:54:16,730
PROFESSOR: Yeah, it depends
on the time and the place,

1281
00:54:16,730 --> 00:54:19,440
whether you're buried in the
desert or just warned off

1282
00:54:19,440 --> 00:54:19,940
or whatever.

1283
00:54:19,940 --> 00:54:24,150
But basically, you have
to fool the casino.

1284
00:54:24,150 --> 00:54:26,670
You're taking money
from the Casino.

1285
00:54:26,670 --> 00:54:30,230
The people who stuck with
this hate casinos a lot more

1286
00:54:30,230 --> 00:54:32,370
than they like money.

1287
00:54:32,370 --> 00:54:33,900
They tend to be
antisocial people.

1288
00:54:33,900 --> 00:54:37,432
You don't need any
social skills, right?

1289
00:54:37,432 --> 00:54:38,890
All you need is--
I mean, if you've

1290
00:54:38,890 --> 00:54:41,310
seen some of the movies, the
MIT blackjack team, Bring

1291
00:54:41,310 --> 00:54:43,710
Down the House,
whatever, you see

1292
00:54:43,710 --> 00:54:46,464
some wildly over the top
play acting to get things.

1293
00:54:46,464 --> 00:54:48,130
That isn't what most
of these guys were.

1294
00:54:48,130 --> 00:54:49,460
Most of these guys were quiet.

1295
00:54:49,460 --> 00:54:51,770
They went in, the
casino gets a game.

1296
00:54:51,770 --> 00:54:53,640
The casino takes care of stuff.

1297
00:54:53,640 --> 00:54:56,440
You just go in and play, but you
have to stay under the radar.

1298
00:54:56,440 --> 00:54:58,802
You can't let the casino notice.

1299
00:54:58,802 --> 00:55:02,050
Now, people also looked at
another field, sports betting.

1300
00:55:02,050 --> 00:55:04,910
Now, sports betting, this
is frequent of stuff.

1301
00:55:04,910 --> 00:55:07,240
This is Bayesian stuff.

1302
00:55:07,240 --> 00:55:12,080
It is a lot easier
to predict how

1303
00:55:12,080 --> 00:55:15,680
people are going to bet than
how a game is going to come out.

1304
00:55:15,680 --> 00:55:19,530
If you wanted to predictive
a game from first principles

1305
00:55:19,530 --> 00:55:21,550
and figure out what the
proper point spread was,

1306
00:55:21,550 --> 00:55:23,070
well, you've got a
big job ahead of you.

1307
00:55:23,070 --> 00:55:23,490
It can be done.

1308
00:55:23,490 --> 00:55:25,698
People have done it and made
some successful results,

1309
00:55:25,698 --> 00:55:27,140
but that's a big job.

1310
00:55:27,140 --> 00:55:29,470
Here's an easy observation
that was enough.

1311
00:55:29,470 --> 00:55:32,730
In the 1970s, this was
enough to make money.

1312
00:55:32,730 --> 00:55:35,360
Los Angeles Lakers
are a glamorous team.

1313
00:55:35,360 --> 00:55:37,320
They were at the time.

1314
00:55:37,320 --> 00:55:39,709
Los Angeles is a
big betting city.

1315
00:55:39,709 --> 00:55:41,250
When the Lakers play
at home, there's

1316
00:55:41,250 --> 00:55:43,860
a lot of money coming
in and betting on them.

1317
00:55:43,860 --> 00:55:46,580
The point spread is going
to be too favorable.

1318
00:55:46,580 --> 00:55:49,079
Bet against the
Lakers at home, right?

1319
00:55:49,079 --> 00:55:50,870
Don't need a genius,
don't need a math PhD,

1320
00:55:50,870 --> 00:55:51,640
don't need a computer.

1321
00:55:51,640 --> 00:55:52,900
You can just figure this out.

1322
00:55:52,900 --> 00:55:54,960
And patterns like this
are very easy to catch,

1323
00:55:54,960 --> 00:55:58,160
but they're based on
understanding people.

1324
00:55:58,160 --> 00:56:00,320
So the malcontents,
the introverts,

1325
00:56:00,320 --> 00:56:02,810
the autistic people,
they all went here.

1326
00:56:02,810 --> 00:56:06,022
The people who like people
went into sports betting.

1327
00:56:06,022 --> 00:56:07,730
Now what happens if
you're sports betting

1328
00:56:07,730 --> 00:56:08,646
and you're successful?

1329
00:56:08,646 --> 00:56:10,080
What happens?

1330
00:56:10,080 --> 00:56:14,140
Well certainly in those
days, they hire you.

1331
00:56:14,140 --> 00:56:15,407
Right?

1332
00:56:15,407 --> 00:56:15,990
They want you.

1333
00:56:15,990 --> 00:56:17,720
Great, hey, you're winning?

1334
00:56:17,720 --> 00:56:19,150
We want to take
advantage of that.

1335
00:56:19,150 --> 00:56:20,170
We'll pay you a salary.

1336
00:56:20,170 --> 00:56:20,861
You bet for us.

1337
00:56:20,861 --> 00:56:22,860
And then the way they
would pay you, by the way,

1338
00:56:22,860 --> 00:56:26,680
is they would let
you make bigger bets.

1339
00:56:26,680 --> 00:56:29,520
And so you become part
of the organization.

1340
00:56:29,520 --> 00:56:33,160
And pretty soon, you're running
your own bookmaking operation

1341
00:56:33,160 --> 00:56:33,660
and so on.

1342
00:56:33,660 --> 00:56:35,560
So these are social people.

1343
00:56:35,560 --> 00:56:37,060
These are Bayesian people.

1344
00:56:37,060 --> 00:56:38,770
These people are
betting on frequencies.

1345
00:56:38,770 --> 00:56:41,340
These people are
betting on people.

1346
00:56:41,340 --> 00:56:43,366
Both of them are learning
skills and techniques

1347
00:56:43,366 --> 00:56:44,990
that nobody taught
in a classroom, that

1348
00:56:44,990 --> 00:56:49,550
were totally generations ahead
of what statisticians were

1349
00:56:49,550 --> 00:56:52,030
doing in academics, what people
were doing in econometrics,

1350
00:56:52,030 --> 00:56:52,821
anything like that.

1351
00:56:52,821 --> 00:56:55,460
These people were because
these people had to.

1352
00:56:55,460 --> 00:56:57,060
It only worked if you're right.

1353
00:56:57,060 --> 00:56:58,480
You're betting every day.

1354
00:56:58,480 --> 00:57:01,600
Smartest people in the world
are spending every waking moment

1355
00:57:01,600 --> 00:57:04,960
trying to find a way to beat it.

1356
00:57:04,960 --> 00:57:06,340
I did some of both of these.

1357
00:57:06,340 --> 00:57:08,150
I also did some poker.

1358
00:57:08,150 --> 00:57:09,960
I was mostly a poker player.

1359
00:57:09,960 --> 00:57:12,140
Poker is kind of in between.

1360
00:57:12,140 --> 00:57:15,490
OK, you've got
some cardplay kind

1361
00:57:15,490 --> 00:57:18,725
of thing, shuffle
reading, things like that.

1362
00:57:18,725 --> 00:57:20,850
But you've also got to know
something about people.

1363
00:57:20,850 --> 00:57:23,050
Not as much as a guy
doing sports betting.

1364
00:57:23,050 --> 00:57:25,924
You don't have to predict
actions of thousands of people.

1365
00:57:25,924 --> 00:57:27,590
But you do got to be
able to look around

1366
00:57:27,590 --> 00:57:29,859
the people at the table
and figure some stuff out.

1367
00:57:29,859 --> 00:57:31,775
You've got to be able
to get invited to games.

1368
00:57:31,775 --> 00:57:33,649
You've got to be able
to collect from losers.

1369
00:57:33,649 --> 00:57:37,240
You've got to be able to avoid
arrest or getting cheated

1370
00:57:37,240 --> 00:57:39,540
or beaten up and
stuff like that.

1371
00:57:39,540 --> 00:57:42,840
So we were kind of in between.

1372
00:57:42,840 --> 00:57:45,420
So a lot of people I know
from those days-- this

1373
00:57:45,420 --> 00:57:49,710
was the '70s, '80s, early '80s--
a lot of people stayed at it.

1374
00:57:49,710 --> 00:57:52,110
But a lot of us, having
honed our skills and figured,

1375
00:57:52,110 --> 00:57:56,050
OK, now we think
we know something.

1376
00:57:56,050 --> 00:57:58,110
I've been playing
poker since I'm 14.

1377
00:57:58,110 --> 00:58:02,971
I've had moderate success in
beating casino games and sports

1378
00:58:02,971 --> 00:58:03,470
betting.

1379
00:58:03,470 --> 00:58:06,070
I've had some really
strong success at poker.

1380
00:58:06,070 --> 00:58:07,380
I have some confidence, right?

1381
00:58:07,380 --> 00:58:09,130
I don't just think
I know something.

1382
00:58:09,130 --> 00:58:09,860
I know something.

1383
00:58:09,860 --> 00:58:13,230
And the reason I believe it
is I've went to the places

1384
00:58:13,230 --> 00:58:15,307
where you test that
stuff and walked away

1385
00:58:15,307 --> 00:58:16,140
with people's money.

1386
00:58:18,670 --> 00:58:21,280
So a lot of us
went into finance.

1387
00:58:21,280 --> 00:58:24,700
So this is really now we're
talking about the early '80s.

1388
00:58:24,700 --> 00:58:28,230
The people who
like casino games,

1389
00:58:28,230 --> 00:58:30,447
they like secretive
little hedge funds.

1390
00:58:30,447 --> 00:58:32,030
They wanted to invest
their own money.

1391
00:58:32,030 --> 00:58:34,254
There are only a few
wealthy investors.

1392
00:58:34,254 --> 00:58:35,670
As soon as they
could, they wanted

1393
00:58:35,670 --> 00:58:39,100
to pay off their investors
and just be by themselves.

1394
00:58:39,100 --> 00:58:43,070
And some of this really
brilliant stuff [INAUDIBLE]

1395
00:58:43,070 --> 00:58:44,170
fairly narrow focused.

1396
00:58:44,170 --> 00:58:46,460
They had to like pick some
narrow niche kind of thing

1397
00:58:46,460 --> 00:58:48,840
and do it.

1398
00:58:48,840 --> 00:58:50,580
Bayesians, these
people were naturals.

1399
00:58:50,580 --> 00:58:52,280
These people went
into big bank stuff.

1400
00:58:52,280 --> 00:58:53,150
They knew people.

1401
00:58:53,150 --> 00:58:54,160
They knew businesses.

1402
00:58:54,160 --> 00:58:58,530
They were bank executive types.

1403
00:58:58,530 --> 00:59:01,019
And by the way, in these
days I'm talking about,

1404
00:59:01,019 --> 00:59:02,810
you left math off your
resume if you wanted

1405
00:59:02,810 --> 00:59:05,090
to apply for a Wall Street job.

1406
00:59:05,090 --> 00:59:06,079
I'm not kidding.

1407
00:59:06,079 --> 00:59:07,620
People thought if
you knew math, it'd

1408
00:59:07,620 --> 00:59:09,727
be like you want
to go to the NFL.

1409
00:59:09,727 --> 00:59:11,310
You know, the NFL,
they don't want you

1410
00:59:11,310 --> 00:59:12,520
if you've got a PhD in math.

1411
00:59:12,520 --> 00:59:15,030
It's like they don't
want smart people.

1412
00:59:15,030 --> 00:59:18,000
Wall Street did not want
people who knew math.

1413
00:59:18,000 --> 00:59:20,120
Some of them understood
that smart people

1414
00:59:20,120 --> 00:59:21,460
would be dangerous.

1415
00:59:21,460 --> 00:59:25,190
Others just thought that anybody
in math had to be ivory tower

1416
00:59:25,190 --> 00:59:28,520
and couldn't possibly
know anything.

1417
00:59:28,520 --> 00:59:30,730
But still, once you
got there, these skills

1418
00:59:30,730 --> 00:59:32,040
were incredibly useful.

1419
00:59:32,040 --> 00:59:36,570
If you'd been five, six years
betting sports successfully,

1420
00:59:36,570 --> 00:59:39,180
you know a lot of stuff
about markets and businesses

1421
00:59:39,180 --> 00:59:41,140
and how to run
things with people

1422
00:59:41,140 --> 00:59:43,160
that some of these
other people would never

1423
00:59:43,160 --> 00:59:45,760
learn their whole lives.

1424
00:59:45,760 --> 00:59:49,390
These people didn't have to get
a job, but they're problem was,

1425
00:59:49,390 --> 00:59:51,050
could they find
somebody to trade with?

1426
00:59:51,050 --> 00:59:53,560
Could they get people
to broker for them,

1427
00:59:53,560 --> 00:59:54,930
to trade with them, and so on?

1428
00:59:54,930 --> 00:59:57,870
So they had a lot
problems with that.

1429
00:59:57,870 --> 01:00:01,930
Me, poker players, people
like me, we could get jobs.

1430
01:00:01,930 --> 01:00:04,500
We didn't want high level
executive jobs though.

1431
01:00:04,500 --> 01:00:08,030
We wanted to run some little
department under the radar

1432
01:00:08,030 --> 01:00:08,530
screen.

1433
01:00:08,530 --> 01:00:10,220
We'd run a quant trading team.

1434
01:00:10,220 --> 01:00:11,350
We do some pairs trading.

1435
01:00:11,350 --> 01:00:12,860
We do some quant stuff.

1436
01:00:12,860 --> 01:00:14,440
We do structured products.

1437
01:00:14,440 --> 01:00:16,730
We did a lot of
that kind of stuff.

1438
01:00:16,730 --> 01:00:20,150
We were used to networking--
we were good at that--

1439
01:00:20,150 --> 01:00:21,320
but under the screen.

1440
01:00:21,320 --> 01:00:24,750
We weren't good at like
showing up in a suit and tie

1441
01:00:24,750 --> 01:00:27,190
and being nice to bosses
and things like that.

1442
01:00:27,190 --> 01:00:29,270
We weren't good
at raising money,

1443
01:00:29,270 --> 01:00:33,200
which is why we had to go
hook up with a big firm.

1444
01:00:33,200 --> 01:00:36,330
We liked the fact that a firm
would give us trading capital,

1445
01:00:36,330 --> 01:00:39,010
the firm would give us
setup relationships,

1446
01:00:39,010 --> 01:00:41,260
so we didn't have any problem
opening up trading lines

1447
01:00:41,260 --> 01:00:42,135
and things like that.

1448
01:00:44,840 --> 01:00:46,800
But we basically got
to keep what we made,

1449
01:00:46,800 --> 01:00:49,530
or we got to keep a
portion of what we made,

1450
01:00:49,530 --> 01:00:52,680
which is a way we like to do it.

1451
01:00:52,680 --> 01:00:56,190
This is what really
revolutionized Wall Street.

1452
01:00:56,190 --> 01:00:59,890
The thing I tell people is,
having lived through this

1453
01:00:59,890 --> 01:01:02,900
from the early '80s
to now, it's people

1454
01:01:02,900 --> 01:01:05,180
don't understand how
much finance has changed.

1455
01:01:05,180 --> 01:01:06,840
An awful lot of
finance is written

1456
01:01:06,840 --> 01:01:09,490
as if there's some
continuous history,

1457
01:01:09,490 --> 01:01:11,520
some minor technical
innovations,

1458
01:01:11,520 --> 01:01:15,120
electronic trading is just a
little bit faster way of people

1459
01:01:15,120 --> 01:01:17,110
yelling at each other in a pit.

1460
01:01:17,110 --> 01:01:18,190
Well, it's not true.

1461
01:01:18,190 --> 01:01:21,170
The entire fundamental
technological basis of finance

1462
01:01:21,170 --> 01:01:24,760
has changed, has
completely been redone.

1463
01:01:24,760 --> 01:01:28,530
I use the analogy of a digital
camera versus a chemical

1464
01:01:28,530 --> 01:01:29,824
camera.

1465
01:01:29,824 --> 01:01:31,740
They kind of look the
same-- or they used, now

1466
01:01:31,740 --> 01:01:32,656
they're in your phone.

1467
01:01:32,656 --> 01:01:35,895
But a few years ago, a digital
camera looked kind of the same.

1468
01:01:35,895 --> 01:01:36,822
It runs on battery.

1469
01:01:36,822 --> 01:01:37,530
It's got a flash.

1470
01:01:37,530 --> 01:01:38,390
It's got a lens.

1471
01:01:38,390 --> 01:01:40,456
It's got a shutter button.

1472
01:01:40,456 --> 01:01:41,830
People use it for
the same thing.

1473
01:01:41,830 --> 01:01:44,038
They take pictures of their
friends, their vacations,

1474
01:01:44,038 --> 01:01:46,170
their parties, things like that.

1475
01:01:46,170 --> 01:01:49,170
But the technology inside is
entirely, totally different.

1476
01:01:49,170 --> 01:01:51,485
If you want to
make a camera, you

1477
01:01:51,485 --> 01:01:52,860
hire completely
different people,

1478
01:01:52,860 --> 01:01:54,270
use completely
different processes,

1479
01:01:54,270 --> 01:01:55,750
the theory is
completely different.

1480
01:01:55,750 --> 01:01:57,510
Well, that's the
difference in finance.

1481
01:01:57,510 --> 01:02:00,435
And the people of my generation,
the quants in my generation,

1482
01:02:00,435 --> 01:02:02,120
are the ones that built that.

1483
01:02:02,120 --> 01:02:04,490
And most of it has a
lot more of its genetics

1484
01:02:04,490 --> 01:02:08,010
come from sports betting and
betting casino games and poker

1485
01:02:08,010 --> 01:02:12,680
than it does from economic
theory of the 1970s and 1980s

1486
01:02:12,680 --> 01:02:13,230
era vintage.

1487
01:02:15,417 --> 01:02:17,500
For those of you who are
interested in this stuff,

1488
01:02:17,500 --> 01:02:19,750
I put a few books here.

1489
01:02:19,750 --> 01:02:21,607
I did these in alphabetical
order of title.

1490
01:02:21,607 --> 01:02:23,190
I do have couple of
my own books here,

1491
01:02:23,190 --> 01:02:26,420
but Beat the Market
by Ed Thorpe.

1492
01:02:26,420 --> 01:02:28,140
Just read anything
you can by Ed Thorpe.

1493
01:02:28,140 --> 01:02:31,339
A lot of it's
available free online.

1494
01:02:31,339 --> 01:02:32,130
You've just got to.

1495
01:02:34,710 --> 01:02:38,790
That's a guy who
understands stuff.

1496
01:02:38,790 --> 01:02:42,330
James McManus, a friend of
mine, wrote Cowboys Full.

1497
01:02:42,330 --> 01:02:44,200
Some of you may remember James.

1498
01:02:44,200 --> 01:02:46,460
He made the final table at
the main event of the World

1499
01:02:46,460 --> 01:02:49,070
Series of Poker and wrote a
best selling book about it,

1500
01:02:49,070 --> 01:02:52,260
which is a lot of fun,
too-- Positively 5th Street.

1501
01:02:52,260 --> 01:02:54,087
But this is a history
of poker if that's

1502
01:02:54,087 --> 01:02:55,170
what you're interested in.

1503
01:02:55,170 --> 01:02:58,882
It's really the only
good history of poker.

1504
01:02:58,882 --> 01:03:01,215
This is a really interesting
book, The Economic Function

1505
01:03:01,215 --> 01:03:03,120
of Futures Markets.

1506
01:03:03,120 --> 01:03:06,520
For about 100 years, people
wrote nothing but nonsense

1507
01:03:06,520 --> 01:03:08,200
about futures markets.

1508
01:03:08,200 --> 01:03:10,100
And then this guy came along.

1509
01:03:10,100 --> 01:03:14,460
He had a PhD, came along, and
wrote a thin book about 1990

1510
01:03:14,460 --> 01:03:16,290
that absolutely explained it.

1511
01:03:16,290 --> 01:03:18,740
And it's funny, because
after reading nonsense-- just

1512
01:03:18,740 --> 01:03:21,694
transparent nonsense about
futures markets all the time--

1513
01:03:21,694 --> 01:03:22,610
this guy wrote a book.

1514
01:03:22,610 --> 01:03:24,980
And the thing about this
book is it's logical.

1515
01:03:24,980 --> 01:03:25,630
It makes sense.

1516
01:03:25,630 --> 01:03:26,590
He's got a story.

1517
01:03:26,590 --> 01:03:27,332
It makes sense.

1518
01:03:27,332 --> 01:03:28,790
He's got empirical
evidence for it.

1519
01:03:28,790 --> 01:03:29,570
He nailed it.

1520
01:03:29,570 --> 01:03:32,102
He explained what
futures markets are.

1521
01:03:32,102 --> 01:03:33,560
And nobody ever
paid any attention.

1522
01:03:33,560 --> 01:03:34,410
I mean, nobody ever cites it.

1523
01:03:34,410 --> 01:03:35,330
Nobody ever reads it.

1524
01:03:35,330 --> 01:03:35,780
Whatever.

1525
01:03:35,780 --> 01:03:37,446
But if you want to
know futures markets,

1526
01:03:37,446 --> 01:03:40,600
this is the guy who explains it.

1527
01:03:40,600 --> 01:03:43,430
Fischer Black-- by the
way, this is the hardback

1528
01:03:43,430 --> 01:03:44,600
which has a blue cover.

1529
01:03:44,600 --> 01:03:46,670
If you buy the paperback
with a black cover,

1530
01:03:46,670 --> 01:03:48,510
it has a foreward by me.

1531
01:03:48,510 --> 01:03:51,430
So I go for the paperback.

1532
01:03:51,430 --> 01:03:54,459
But this is really interesting.

1533
01:03:54,459 --> 01:03:56,000
If you're interested
in the time when

1534
01:03:56,000 --> 01:03:57,737
I was at Harvard and
hanging around MIT

1535
01:03:57,737 --> 01:03:59,320
and talking to people
who were arguing

1536
01:03:59,320 --> 01:04:01,000
about this kind of
stuff, Fischer Black

1537
01:04:01,000 --> 01:04:03,790
was a very important
part of that.

1538
01:04:03,790 --> 01:04:06,450
I knew him pretty
well in those days.

1539
01:04:06,450 --> 01:04:11,000
And there's a lot of really
interesting stuff about how

1540
01:04:11,000 --> 01:04:13,200
logic and rationality
and mathematics actually

1541
01:04:13,200 --> 01:04:16,030
came into finance.

1542
01:04:16,030 --> 01:04:17,420
It didn't come in naturally.

1543
01:04:17,420 --> 01:04:20,680
It was some eccentric thinkers--
Fischer Black was nothing if

1544
01:04:20,680 --> 01:04:22,830
not eccentric-- who did it.

1545
01:04:22,830 --> 01:04:24,950
And this book explains it.

1546
01:04:24,950 --> 01:04:27,230
A guy by the name of Perry
Mehrling, Perry Mehrling's

1547
01:04:27,230 --> 01:04:30,837
a nice guy who wrote another
good book, The New Lombard

1548
01:04:30,837 --> 01:04:33,045
Street, that's very interesting
about modern finance.

1549
01:04:35,970 --> 01:04:39,260
This is a book by Daniel
Usner, who I do not know.

1550
01:04:39,260 --> 01:04:40,790
This kind of covers
the prehistory.

1551
01:04:40,790 --> 01:04:42,510
This tells you
what the world was

1552
01:04:42,510 --> 01:04:47,070
like in the Northwest United
States before poker came in.

1553
01:04:47,070 --> 01:04:51,670
It goes up to, I
think, 1791 or so.

1554
01:04:51,670 --> 01:04:53,370
So it's a pre-history.

1555
01:04:53,370 --> 01:04:55,240
But it's really
fascinating economics.

1556
01:04:55,240 --> 01:04:57,717
There was a really
fascinating economy

1557
01:04:57,717 --> 01:04:58,800
in this part of the world.

1558
01:04:58,800 --> 01:05:03,450
The pre-modern economy,
but it had within it more

1559
01:05:03,450 --> 01:05:07,110
of the design of the modern
economy than if you'd

1560
01:05:07,110 --> 01:05:10,380
gone to London or New
York at the same time.

1561
01:05:10,380 --> 01:05:12,170
This is a book, another
guy I don't know.

1562
01:05:12,170 --> 01:05:13,669
I actually talked
to him a few times

1563
01:05:13,669 --> 01:05:15,495
about this book when
he was writing it,

1564
01:05:15,495 --> 01:05:17,010
but this is More Money Than God.

1565
01:05:17,010 --> 01:05:18,947
It's an excellent story
of the early hedge

1566
01:05:18,947 --> 01:05:20,780
funds, a lot of these
people who were coming

1567
01:05:20,780 --> 01:05:22,800
from these sorts of
backgrounds, bringing

1568
01:05:22,800 --> 01:05:24,185
some mathematics into finance.

1569
01:05:26,755 --> 01:05:28,390
It doesn't have a
tremendous insight.

1570
01:05:28,390 --> 01:05:30,490
He doesn't get
into the strategies

1571
01:05:30,490 --> 01:05:32,750
or the intellectual
ideas behind the things,

1572
01:05:32,750 --> 01:05:34,690
but he'll tell you the
stories of the people

1573
01:05:34,690 --> 01:05:37,890
and what happened
and stuff like that.

1574
01:05:37,890 --> 01:05:39,790
Two books that I--
I sort of did this

1575
01:05:39,790 --> 01:05:42,550
as I was coming up with this
and I just pulled up some books.

1576
01:05:42,550 --> 01:05:44,039
But there are two
that I left off

1577
01:05:44,039 --> 01:05:45,580
that I was thinking
on the train ride

1578
01:05:45,580 --> 01:05:47,240
up I should have put on here.

1579
01:05:47,240 --> 01:05:48,745
One of them is
called Poker Faces

1580
01:05:48,745 --> 01:05:52,510
by a guy named David Hayano.

1581
01:05:52,510 --> 01:05:54,560
He's another guy,
knew him in Gardena.

1582
01:05:54,560 --> 01:05:56,720
He was a player in Gardena.

1583
01:05:56,720 --> 01:05:59,750
He was also working on
his PhD in sociology.

1584
01:05:59,750 --> 01:06:05,040
Actually, he called himself
an autoethnographer.

1585
01:06:05,040 --> 01:06:11,639
So he was an ethnographer
who studied himself.

1586
01:06:11,639 --> 01:06:12,180
And he wrote.

1587
01:06:12,180 --> 01:06:14,554
Anyway, he wrote he wrote a
book on Gardena and the poker

1588
01:06:14,554 --> 01:06:15,940
economy and what it was like.

1589
01:06:15,940 --> 01:06:17,567
I'm actually in the book.

1590
01:06:17,567 --> 01:06:19,400
But it really is a great
book, and it really

1591
01:06:19,400 --> 01:06:22,190
tells you kind of what the poker
economy was like in the '70s.

1592
01:06:22,190 --> 01:06:27,090
I think that was the last
gasp that takes us back.

1593
01:06:27,090 --> 01:06:31,530
It was a lot weaker than it
was in the 1840s Chicago.

1594
01:06:31,530 --> 01:06:34,140
So it wasn't as
important to the economy,

1595
01:06:34,140 --> 01:06:35,670
but it was still there.

1596
01:06:35,670 --> 01:06:39,720
You could really see a lot
of the relations, how things

1597
01:06:39,720 --> 01:06:41,187
worked, really were there.

1598
01:06:41,187 --> 01:06:42,520
I think that's kind of gone now.

1599
01:06:42,520 --> 01:06:44,890
You really don't
find that today.

1600
01:06:44,890 --> 01:06:47,610
Another one is by a guy, a
friend of mine, professor Phil

1601
01:06:47,610 --> 01:06:49,500
Tetlock lock at Wharton.

1602
01:06:49,500 --> 01:06:53,240
He wrote a book called
Expert Political Judgment.

1603
01:06:53,240 --> 01:06:54,790
And that tells you
a lot about what

1604
01:06:54,790 --> 01:06:57,630
the things that drove
me away from basically

1605
01:06:57,630 --> 01:07:00,240
how bad experts are
predicting stuff.

1606
01:07:00,240 --> 01:07:02,124
And what really drives
you to-- if you're

1607
01:07:02,124 --> 01:07:04,540
good at this tough stuff, if
you're a quantitative person,

1608
01:07:04,540 --> 01:07:07,660
if you like to make bets, if
you like to back your judgment,

1609
01:07:07,660 --> 01:07:09,510
you've just got to
stay away from experts.

1610
01:07:09,510 --> 01:07:12,220
You've got to go someplace where
you find out in cold, hard cash

1611
01:07:12,220 --> 01:07:15,700
whether you're making
good or bad predictions.

1612
01:07:15,700 --> 01:07:17,800
Pokerface of Wall
Street, this is by me.

1613
01:07:17,800 --> 01:07:21,060
This covers a lot of
stuff I'm talking about,

1614
01:07:21,060 --> 01:07:24,050
the connection between
poker and finance.

1615
01:07:24,050 --> 01:07:26,990
And Red Blooded
Risk, also by me,

1616
01:07:26,990 --> 01:07:29,870
this tells a lot more about
how people brought ideas

1617
01:07:29,870 --> 01:07:37,380
from sports betting and
poker and Casino games

1618
01:07:37,380 --> 01:07:43,390
and how that entered
into mainstream finance.

1619
01:07:43,390 --> 01:07:46,250
OK, that's what I've got.

1620
01:07:46,250 --> 01:07:48,651
Any questions, comments?

1621
01:07:48,651 --> 01:07:49,150
Yeah?

1622
01:07:49,150 --> 01:07:54,870
AUDIENCE: How good was George
Bush and Bill Gates at Poker?

1623
01:07:54,870 --> 01:07:57,565
PROFESSOR: I can't really
answer that in the sense that--

1624
01:07:57,565 --> 01:07:58,940
to really answer
that, you'd have

1625
01:07:58,940 --> 01:08:00,870
to like tracked their
winnings and losing

1626
01:08:00,870 --> 01:08:02,180
for long periods of time.

1627
01:08:02,180 --> 01:08:04,640
Bill ran a game
in Courier House.

1628
01:08:04,640 --> 01:08:06,100
I didn't like the game.

1629
01:08:06,100 --> 01:08:09,420
It was a very tense game.

1630
01:08:09,420 --> 01:08:13,330
I always got the feeling people
lost more than they wanted to

1631
01:08:13,330 --> 01:08:15,680
and it wasn't a
lot of fun to play.

1632
01:08:15,680 --> 01:08:20,226
He was certainly a respectable
player at the time.

1633
01:08:20,226 --> 01:08:21,850
You also have to
understand, I'm coming

1634
01:08:21,850 --> 01:08:23,020
from a slightly
different perspective.

1635
01:08:23,020 --> 01:08:24,700
I'm really at this
point one of the best

1636
01:08:24,700 --> 01:08:26,145
players in the country.

1637
01:08:26,145 --> 01:08:27,811
We didn't really have
ranking back then,

1638
01:08:27,811 --> 01:08:29,149
it was kind of hard to tell.

1639
01:08:29,149 --> 01:08:31,800
But I would say there were
maybe 100 people in the country

1640
01:08:31,800 --> 01:08:33,675
that I would have felt
more or less equal to,

1641
01:08:33,675 --> 01:08:34,970
and I wasn't afraid of anybody.

1642
01:08:34,970 --> 01:08:36,260
I would sit down at
the table with anybody

1643
01:08:36,260 --> 01:08:37,609
and play them kind of even.

1644
01:08:37,609 --> 01:08:39,729
So none of these people
where that level.

1645
01:08:39,729 --> 01:08:41,180
None of these
people were kind of

1646
01:08:41,180 --> 01:08:43,510
serious, professional players.

1647
01:08:43,510 --> 01:08:50,779
But in somebody can be a very
competent, careful player.

1648
01:08:50,779 --> 01:08:52,529
George Bush was a lot
of fun to play with.

1649
01:08:55,700 --> 01:08:57,359
Ran a great game.

1650
01:08:57,359 --> 01:08:59,979
I don't think he was too
interested in the money.

1651
01:08:59,979 --> 01:09:00,700
I'm not sure.

1652
01:09:00,700 --> 01:09:01,840
He didn't seem to be.

1653
01:09:05,050 --> 01:09:07,390
Probably more interested in
the connections, by the way.

1654
01:09:07,390 --> 01:09:08,569
By the way, that
drove a lot of people.

1655
01:09:08,569 --> 01:09:10,849
A lot of people-- I'm
talking about this networking

1656
01:09:10,849 --> 01:09:12,130
in kind of this abstract.

1657
01:09:12,130 --> 01:09:13,510
See, I'm an introvert.

1658
01:09:13,510 --> 01:09:16,222
So for me, it's kind
of this amazing thing

1659
01:09:16,222 --> 01:09:17,680
that you can create
these networks.

1660
01:09:17,680 --> 01:09:19,263
I'm thinking of them
very mathematical

1661
01:09:19,263 --> 01:09:20,729
and have a diagram.

1662
01:09:20,729 --> 01:09:22,740
A lot of people are
just wired that way.

1663
01:09:22,740 --> 01:09:25,412
They understand on some--
they don't sit down and draw

1664
01:09:25,412 --> 01:09:26,120
network diagrams.

1665
01:09:26,120 --> 01:09:27,399
They say, I'm going
to play in this game.

1666
01:09:27,399 --> 01:09:28,229
I'm going to make some friends.

1667
01:09:28,229 --> 01:09:29,450
I'm going to chat
with my friends.

1668
01:09:29,450 --> 01:09:30,930
I'm going to buy
a baseball team.

1669
01:09:30,930 --> 01:09:32,569
I'm going to be
president, whatever.

1670
01:09:32,569 --> 01:09:34,374
It works for them.

1671
01:09:34,374 --> 01:09:35,790
And that stuff
never works for me.

1672
01:09:35,790 --> 01:09:36,831
I have to think about it.

1673
01:09:36,831 --> 01:09:40,310
I have to do this on
an intellectual level.

1674
01:09:40,310 --> 01:09:42,439
[INAUDIBLE] I would say
of the people I played

1675
01:09:42,439 --> 01:09:47,060
at Harvard at that time,
the two that were probably

1676
01:09:47,060 --> 01:09:50,990
the best in my recollection were
Scott Turow, the author, who

1677
01:09:50,990 --> 01:09:54,790
was really could have
been a pro level player.

1678
01:09:54,790 --> 01:09:59,310
Probably didn't play enough to
do it, but had the instincts,

1679
01:09:59,310 --> 01:10:01,820
had the people skills and so on.

1680
01:10:01,820 --> 01:10:04,690
And a guy named Lloyd Trefethen
who's a mathematician at Oxford

1681
01:10:04,690 --> 01:10:07,800
now and just was a
really good-- actually

1682
01:10:07,800 --> 01:10:09,220
taught me a lot of theory.

1683
01:10:09,220 --> 01:10:11,000
We talked about
that stuff a lot.

1684
01:10:15,030 --> 01:10:18,400
But all this, one thing I
will say in terms of that.

1685
01:10:18,400 --> 01:10:20,740
The people at Garden,
the people at Gardena

1686
01:10:20,740 --> 01:10:23,930
really were a cut above that.

1687
01:10:23,930 --> 01:10:26,460
A pretty good club player
at Gardena, somebody

1688
01:10:26,460 --> 01:10:28,690
who just kind of was
playing at the top stakes

1689
01:10:28,690 --> 01:10:32,380
and breaking even, somebody
like that was so much

1690
01:10:32,380 --> 01:10:35,330
better than the leather
ass Texas road gamblers

1691
01:10:35,330 --> 01:10:37,916
who were playing off in
the World Series of Poker

1692
01:10:37,916 --> 01:10:38,790
and things like that.

1693
01:10:38,790 --> 01:10:40,350
You went to Las Vegas,
and these people just

1694
01:10:40,350 --> 01:10:41,630
were not very good at poker.

1695
01:10:41,630 --> 01:10:44,220
Now, they were very
good at making money

1696
01:10:44,220 --> 01:10:46,640
at poker, which is a
little bit different.

1697
01:10:46,640 --> 01:10:49,510
But if you just sat down, if you
just listened to the analysis

1698
01:10:49,510 --> 01:10:51,880
they gave for why they
did things when they did,

1699
01:10:51,880 --> 01:10:56,790
it was just-- they
believed in luck.

1700
01:10:56,790 --> 01:10:59,370
They would make these
arguments that just

1701
01:10:59,370 --> 01:11:01,870
made no strategic sense at all.

1702
01:11:01,870 --> 01:11:04,110
They weren't even thinking
in terms of what you think

1703
01:11:04,110 --> 01:11:07,150
of [? as ?] [? poker. ?] Now,
that had very little to do with

1704
01:11:07,150 --> 01:11:10,260
making a living at poker.

1705
01:11:10,260 --> 01:11:14,630
One of the stories I like
to tell is there's a story

1706
01:11:14,630 --> 01:11:16,700
that's-- I read it
in a book, actually.

1707
01:11:16,700 --> 01:11:18,700
I didn't know this at
the time, but three

1708
01:11:18,700 --> 01:11:21,770
WSOP winners-- It
might have been

1709
01:11:21,770 --> 01:11:23,250
Dolly Brunsen, Sailor Roberts.

1710
01:11:23,250 --> 01:11:26,150
Sailor Roberts
was a good player.

1711
01:11:26,150 --> 01:11:29,280
He was probably the only one in
that crowd that was really top.

1712
01:11:29,280 --> 01:11:32,070
And one other, they used
to drive around Texas

1713
01:11:32,070 --> 01:11:34,410
and play in just
local [INAUDIBLE].

1714
01:11:34,410 --> 01:11:38,100
OK, 3 WSOP winners playing
in these Texas games

1715
01:11:38,100 --> 01:11:40,830
and stuff, just local people.

1716
01:11:40,830 --> 01:11:43,240
They should clean up, or they
should make tons of money.

1717
01:11:43,240 --> 01:11:45,234
Sailor told me they broke even.

1718
01:11:45,234 --> 01:11:47,400
They just weren't really
making money playing poker.

1719
01:11:47,400 --> 01:11:49,860
What they were
doing was they were

1720
01:11:49,860 --> 01:11:52,284
bag men for betting on
high school football.

1721
01:11:52,284 --> 01:11:53,700
So they were going
to these towns,

1722
01:11:53,700 --> 01:11:54,900
they were playing some poker.

1723
01:11:54,900 --> 01:11:56,483
And then they were
collecting the bets

1724
01:11:56,483 --> 01:11:58,460
and moving around and
getting paid for that.

1725
01:11:58,460 --> 01:12:00,960
But the poker was a break
even operation for them.

1726
01:12:00,960 --> 01:12:03,860
So a lot of people who have
great reputations in the poker

1727
01:12:03,860 --> 01:12:08,275
place, lots of colorful stories,
and just you set them down

1728
01:12:08,275 --> 01:12:11,220
at a computer, you set them down
at a tournament or something,

1729
01:12:11,220 --> 01:12:15,940
they would just be
toast in five minutes.

1730
01:12:15,940 --> 01:12:19,130
But the people, the
people in Gardena--

1731
01:12:19,130 --> 01:12:21,857
who were much better in
terms of theoretical poker

1732
01:12:21,857 --> 01:12:24,065
playing and playing the
game-- we would've been toast

1733
01:12:24,065 --> 01:12:25,380
in that tavern in Texas, right?

1734
01:12:25,380 --> 01:12:27,588
We would've been beaten over
the head with a pool cue

1735
01:12:27,588 --> 01:12:30,432
and left out with the
cows or something.

1736
01:12:30,432 --> 01:12:31,890
I don't just mean
we weren't tough.

1737
01:12:31,890 --> 01:12:32,900
We weren't tough.

1738
01:12:32,900 --> 01:12:34,390
We aren't tough.

1739
01:12:34,390 --> 01:12:35,860
We didn't have social skills.

1740
01:12:35,860 --> 01:12:37,790
We had just enough
social skills,

1741
01:12:37,790 --> 01:12:40,260
some of us-- most of them
didn't even have that.

1742
01:12:40,260 --> 01:12:43,441
I was considered pretty social
because I could actually

1743
01:12:43,441 --> 01:12:45,690
get a game together of normal
people and collect money

1744
01:12:45,690 --> 01:12:46,200
and so on.

1745
01:12:46,200 --> 01:12:47,970
Most of these people couldn't.

1746
01:12:47,970 --> 01:12:50,710
They couldn't play
with normal people.

1747
01:12:50,710 --> 01:12:56,890
And none of us had the kind of
skills that those people did.

1748
01:12:56,890 --> 01:12:58,030
Other questions?

1749
01:12:58,030 --> 01:12:58,530
Yeah?

1750
01:12:58,530 --> 01:13:00,529
AUDIENCE: You think if
you're a good player,

1751
01:13:00,529 --> 01:13:02,570
are you better off making
a big name for yourself

1752
01:13:02,570 --> 01:13:04,814
or staying under the radar?

1753
01:13:04,814 --> 01:13:06,480
PROFESSOR: That's
hard for me to answer,

1754
01:13:06,480 --> 01:13:08,539
because I come from
a strong tradition

1755
01:13:08,539 --> 01:13:09,580
of being under the radar.

1756
01:13:09,580 --> 01:13:11,038
It was very hard
for me to come up.

1757
01:13:11,038 --> 01:13:13,750
When I wrote this book,
this was my first public

1758
01:13:13,750 --> 01:13:14,430
acknowledgement.

1759
01:13:14,430 --> 01:13:15,930
I mean, people who
knew me knew I played.

1760
01:13:15,930 --> 01:13:17,763
Including on Wall
Street-- you know, I mean,

1761
01:13:17,763 --> 01:13:19,700
a lot of famous
people on Wall Street

1762
01:13:19,700 --> 01:13:21,250
play and play with whatever.

1763
01:13:21,250 --> 01:13:23,660
But to sort of
come out in print--

1764
01:13:23,660 --> 01:13:25,110
and when I talk
to people, I said,

1765
01:13:25,110 --> 01:13:27,110
I'm going to tell a story
about you in the book.

1766
01:13:27,110 --> 01:13:28,820
And people who you
would think would

1767
01:13:28,820 --> 01:13:31,790
have no problem being identified
as a poker player just

1768
01:13:31,790 --> 01:13:34,590
would not let me do it.

1769
01:13:34,590 --> 01:13:37,950
But that said, there's a
whole career out there.

1770
01:13:37,950 --> 01:13:39,700
I don't know if it's
still true, but there

1771
01:13:39,700 --> 01:13:42,790
are people who made fortunes
by being famous poker players.

1772
01:13:42,790 --> 01:13:45,710
And the thing I always
kind of wanted to do,

1773
01:13:45,710 --> 01:13:47,410
I never liked tournaments.

1774
01:13:47,410 --> 01:13:48,760
I don't like casinos.

1775
01:13:48,760 --> 01:13:51,304
I played them
sometimes, but I like

1776
01:13:51,304 --> 01:13:52,470
playing when I want to play.

1777
01:13:52,470 --> 01:13:54,011
I don't like being
told when to play,

1778
01:13:54,011 --> 01:13:56,490
and some of these
casinos, the experience

1779
01:13:56,490 --> 01:13:58,940
is just so physically
unpleasant,

1780
01:13:58,940 --> 01:14:01,220
playing at 2:00 in the
morning and getting bad chairs

1781
01:14:01,220 --> 01:14:01,750
or whatever.

1782
01:14:01,750 --> 01:14:07,050
But I was tempted by
high stakes poker.

1783
01:14:07,050 --> 01:14:10,585
And I always thought that would
be kind of fun to go in there

1784
01:14:10,585 --> 01:14:12,710
and play for cash and be
on television and do that.

1785
01:14:12,710 --> 01:14:16,454
That was one that I
kind of thought of.

1786
01:14:16,454 --> 01:14:20,480
But you also have to think
a little bit-- like I say,

1787
01:14:20,480 --> 01:14:23,450
people in AQR have no problem
with me writing the books

1788
01:14:23,450 --> 01:14:25,295
and giving talks
like this and so on.

1789
01:14:25,295 --> 01:14:27,670
I don't know about me being
actually in poker after that.

1790
01:14:27,670 --> 01:14:31,920
That probably would
be a step too much.

1791
01:14:31,920 --> 01:14:34,990
So I think it's a choice
you make, who you are.

1792
01:14:34,990 --> 01:14:37,690
And I think if you decide who
you are and you're true to it,

1793
01:14:37,690 --> 01:14:39,530
you can be successful.

1794
01:14:39,530 --> 01:14:41,364
What you don't want to
do is put on a front.

1795
01:14:41,364 --> 01:14:43,280
If you put on a front
for something like that,

1796
01:14:43,280 --> 01:14:44,850
it can come back to haunt you.

1797
01:14:44,850 --> 01:14:48,070
So if you are a celebrity--
I'm just not a celebrity.

1798
01:14:48,070 --> 01:14:48,810
I never could be.

1799
01:14:48,810 --> 01:14:50,310
I'd never be happy being one.

1800
01:14:50,310 --> 01:14:54,009
Nobody's offered to make
me one, but-- and it

1801
01:14:54,009 --> 01:14:55,050
wouldn't be right for me.

1802
01:14:55,050 --> 01:14:57,990
But if you are cut from that
cloth, you should do it.

1803
01:14:57,990 --> 01:15:00,370
Be true to yourself.

1804
01:15:00,370 --> 01:15:00,870
Yeah?

1805
01:15:00,870 --> 01:15:03,036
AUDIENCE: How do you feel
the view of mathematicians

1806
01:15:03,036 --> 01:15:08,399
on Wall Street has
changed since [INAUDIBLE]

1807
01:15:08,399 --> 01:15:09,940
PROFESSOR: Sorry,
perception of what?

1808
01:15:09,940 --> 01:15:12,720
AUDIENCE: Of mathematicians.

1809
01:15:12,720 --> 01:15:15,100
PROFESSOR: It's gone through--
it kind of goes through.

1810
01:15:15,100 --> 01:15:19,190
OK, so first, it
was just laughable.

1811
01:15:19,190 --> 01:15:21,860
And let me explain how Wall
Street works, by the way.

1812
01:15:21,860 --> 01:15:22,910
Wall Street is sales.

1813
01:15:22,910 --> 01:15:23,810
Finance is sales.

1814
01:15:23,810 --> 01:15:26,890
All the money in finance always
has, always will be in sales.

1815
01:15:26,890 --> 01:15:28,530
A few quants can make
a couple of bucks

1816
01:15:28,530 --> 01:15:30,950
on the edges-- a
few billion, even--

1817
01:15:30,950 --> 01:15:33,270
but it's just not a lot in
the whole scheme of things.

1818
01:15:33,270 --> 01:15:36,710
If you can bring money in,
if you can gather assets,

1819
01:15:36,710 --> 01:15:39,050
it's always been rewarded.

1820
01:15:39,050 --> 01:15:42,370
So when the early quants
came, the attitude is,

1821
01:15:42,370 --> 01:15:46,490
let's say you're
like LOR associate.

1822
01:15:46,490 --> 01:15:52,932
People [? know ?] [? that. ?]
O'Brian, Rubinstein,

1823
01:15:52,932 --> 01:15:53,640
and I'm blanking.

1824
01:15:53,640 --> 01:15:55,070
These are the people who
did portfolio insurance

1825
01:15:55,070 --> 01:15:56,040
in the '80s, whatever.

1826
01:15:56,040 --> 01:15:58,030
Anyway, so these finance
professors show up,

1827
01:15:58,030 --> 01:15:59,377
these quants show up.

1828
01:15:59,377 --> 01:16:00,960
What Wall Street is
saying, hey great.

1829
01:16:00,960 --> 01:16:01,915
We don't care.

1830
01:16:01,915 --> 01:16:03,190
You could astrologers.

1831
01:16:03,190 --> 01:16:06,080
You could be
chartists, whatever.

1832
01:16:06,080 --> 01:16:08,289
If you're gathering assets
and you're giving it to us

1833
01:16:08,289 --> 01:16:09,830
and paying us
commissions to trade it

1834
01:16:09,830 --> 01:16:12,390
back and forth, if you're
giving people reason to trade,

1835
01:16:12,390 --> 01:16:13,835
we're happy to service you.

1836
01:16:13,835 --> 01:16:15,120
And we'll pretend we
like you, and we'll

1837
01:16:15,120 --> 01:16:16,120
pretend to respect you.

1838
01:16:16,120 --> 01:16:17,274
Whatever, we don't care.

1839
01:16:17,274 --> 01:16:18,190
And they really don't.

1840
01:16:18,190 --> 01:16:20,990
And so that was kind of the
attitude toward mathematicians.

1841
01:16:20,990 --> 01:16:22,860
If you have a way
to generate trades

1842
01:16:22,860 --> 01:16:25,390
and to talk people into
trading, great, because we're

1843
01:16:25,390 --> 01:16:26,690
just taking a commission.

1844
01:16:26,690 --> 01:16:29,273
All we care about is that people
are coming in and doing this.

1845
01:16:31,251 --> 01:16:33,375
Then they started figuring
out that, you know, hey,

1846
01:16:33,375 --> 01:16:33,958
wait a minute.

1847
01:16:33,958 --> 01:16:35,890
These guys aren't
like everybody else.

1848
01:16:35,890 --> 01:16:38,390
These guys actually
are making money.

1849
01:16:38,390 --> 01:16:40,620
Some of this stuff
really does make money.

1850
01:16:40,620 --> 01:16:43,630
That's very, very
difficult for Wall Street

1851
01:16:43,630 --> 01:16:45,160
to come to terms with.

1852
01:16:45,160 --> 01:16:47,540
There's a New York
Times Magazine article

1853
01:16:47,540 --> 01:16:51,760
about Lehman Brothers with Lou
Gluckman and Peter Peterson,

1854
01:16:51,760 --> 01:16:54,880
the clash of those cultures--
the shirt sleeve, cigar

1855
01:16:54,880 --> 01:16:59,940
chomping trader culture, totally
at odds with the white shoe

1856
01:16:59,940 --> 01:17:03,020
investment banking culture
when these two things crashed.

1857
01:17:03,020 --> 01:17:05,920
So then people were kind of
afraid of mathematicians,

1858
01:17:05,920 --> 01:17:08,930
but also somewhat
dismissive of them.

1859
01:17:08,930 --> 01:17:17,110
So then I think it's kind of
mellowed out a little bit.

1860
01:17:17,110 --> 01:17:20,330
But I will still say, AQR
is a quant hedge fund.

1861
01:17:20,330 --> 01:17:25,450
When we go and do
our credit thing,

1862
01:17:25,450 --> 01:17:29,280
the credit counterparties,
the assumption

1863
01:17:29,280 --> 01:17:31,975
is nobody can understand
your black box trading.

1864
01:17:31,975 --> 01:17:33,087
Now, that's just not true.

1865
01:17:33,087 --> 01:17:34,420
I mean, we are very transparent.

1866
01:17:34,420 --> 01:17:35,211
We can sit it down.

1867
01:17:35,211 --> 01:17:38,110
And certainly any of you could
figure it out in five minutes,

1868
01:17:38,110 --> 01:17:40,292
but other people would
maybe take an hour.

1869
01:17:40,292 --> 01:17:41,250
But we can lay it down.

1870
01:17:41,250 --> 01:17:42,410
Here's what we do.

1871
01:17:42,410 --> 01:17:44,830
Here are the eight signals
and we measure these things.

1872
01:17:44,830 --> 01:17:47,210
And we add them up
and we find the best

1873
01:17:47,210 --> 01:17:49,590
and we buy this
and we short that.

1874
01:17:49,590 --> 01:17:53,220
It's a lot simpler than
somebody who's saying,

1875
01:17:53,220 --> 01:17:56,100
oh, I'm doing this quantitative
analysis or technical analysis

1876
01:17:56,100 --> 01:17:58,451
or fundamental stuff and I'm
thinking about all these 80

1877
01:17:58,451 --> 01:17:58,950
factors.

1878
01:17:58,950 --> 01:18:02,220
We tell you exactly what we do.

1879
01:18:02,220 --> 01:18:05,144
And they always assign the most
junior credit person to us,

1880
01:18:05,144 --> 01:18:07,310
because they figure nobody
can understand it anyway,

1881
01:18:07,310 --> 01:18:10,550
so why waste somebody who
knows what's going on?

1882
01:18:10,550 --> 01:18:14,650
That kind of prejudice you
still find a lot, that somehow

1883
01:18:14,650 --> 01:18:16,370
what we do is crazy.

1884
01:18:16,370 --> 01:18:17,597
It's a little weird.

1885
01:18:17,597 --> 01:18:18,930
Nobody can really understand it.

1886
01:18:18,930 --> 01:18:21,517
It seems to kind of work, so
we'll continue to do business.

1887
01:18:21,517 --> 01:18:22,350
We'll recommend you.

1888
01:18:22,350 --> 01:18:24,570
We'll put our client's
money in you, but not

1889
01:18:24,570 --> 01:18:28,290
with the same confidence we
have with a guy who's saying,

1890
01:18:28,290 --> 01:18:31,160
I went to the company
and I pounded the tires

1891
01:18:31,160 --> 01:18:34,150
and I talked to the CEO
and I shook him and said,

1892
01:18:34,150 --> 01:18:35,810
tell me what's
really going on here.

1893
01:18:35,810 --> 01:18:38,320
And I understand this stuff.

1894
01:18:38,320 --> 01:18:41,270
The biggest problem is
you're quant's not confident.

1895
01:18:41,270 --> 01:18:47,024
It's still the case that people
measure your credibility,

1896
01:18:47,024 --> 01:18:49,190
how much they believe you,
by how confident you are.

1897
01:18:49,190 --> 01:18:51,290
So if I come in and say,
well, I got this model.

1898
01:18:51,290 --> 01:18:52,498
It seems to work pretty well.

1899
01:18:52,498 --> 01:18:55,250
I think I got a 60% chance that
this trade will make money.

1900
01:18:55,250 --> 01:18:57,750
They just think you're-- they
don't know where you're coming

1901
01:18:57,750 --> 01:18:58,820
from, what planet.

1902
01:18:58,820 --> 01:19:01,153
A guy comes in and says, I'm
sure this is going to work.

1903
01:19:01,153 --> 01:19:01,830
It's got to.

1904
01:19:01,830 --> 01:19:03,930
I've got all these
87 reasons, whatever.

1905
01:19:03,930 --> 01:19:05,220
Now, they don't believe them.

1906
01:19:05,220 --> 01:19:07,300
They think it's 51% just like.

1907
01:19:07,300 --> 01:19:09,390
But they expect
him to be confident

1908
01:19:09,390 --> 01:19:10,967
and they understand that.

1909
01:19:10,967 --> 01:19:12,550
So I think that's
the biggest problem.

1910
01:19:12,550 --> 01:19:14,216
If you want to be a
quant and you really

1911
01:19:14,216 --> 01:19:17,020
want to be honest about
your confidence for things,

1912
01:19:17,020 --> 01:19:19,696
it is shocking to people
how little you know.

1913
01:19:19,696 --> 01:19:22,950
It is shocking to people
that with all this work,

1914
01:19:22,950 --> 01:19:25,890
51% is still pretty good.

1915
01:19:25,890 --> 01:19:28,480
And that, I think,
is a barrier we're

1916
01:19:28,480 --> 01:19:30,730
going to have real
trouble ever surmounting.

1917
01:19:30,730 --> 01:19:33,610
A quant can
understand, hey, 51%?

1918
01:19:33,610 --> 01:19:35,930
Enough bets, you can
be a casino raking

1919
01:19:35,930 --> 01:19:37,110
in the money in roulette.

1920
01:19:37,110 --> 01:19:38,830
That's great.

1921
01:19:38,830 --> 01:19:41,210
Non-quants have problem
with that concept,

1922
01:19:41,210 --> 01:19:47,180
which is why they're playing
roulette without the glasses.

1923
01:19:49,740 --> 01:19:51,274
OK, we--

1924
01:19:51,274 --> 01:19:53,007
AUDIENCE: We don't
have enough time.

1925
01:19:53,007 --> 01:19:55,340
PROFESSOR: Well, thank you
very much for your attention.

1926
01:19:55,340 --> 01:19:58,690
[APPLAUSE]