In 1948, Bell Labs mathematician Claude Shannon published a paper in the Bell System Technical Journal, A Mathematical Theory Of Communication.

There were no book reviews. Not a single newspaper mentioned it. And I doubt there’s ever been any major media coverage about it – ever. But it changed the entire world.

After Albert Einstein, Shannon was the greatest mind of the 20th century. Shannon worked out precisely how much information a communication channel could carry. His theory inspired the entire digital world, because digital communication systems can carry immensely more information than analog systems. Every phone call, every file, every byte you have ever created or consumed in the last 30 years runs on his math.

And it turns out, you can use the same kind of math to optimize investments, too.

In 1956, a colleague of Shannon’s, a physicist named John Kelly, recognized that you could apply the same logic to other kinds of signal-to-noise problems – including financial scenarios. A gambler placing bets on tips faces the exact same problem as an engineer pushing a signal down a telephone line. Some of the information will be lost to noise. Some of the tips the gambler follows won’t pay off.

The question for the gambler is: How big can you size your bets so that your bankroll grows as fast as possible, without going bust because of the tips that don’t pan out? Kelly figured it out using Shannon’s math. The fastest rate at which you can grow a bankroll is governed by the quality of your information.

Signal is your investment edge. The noise is the risk you take – the volatility. To maximize the edge and to protect from the noise, you must bet in proportion to your edge and in inverse proportion to the noise.

At about the same time, a young mathematician named Edward Thorp figured out how to beat the dealer at blackjack by counting cards. Thorp knew to win he had to bet small when the odds weren’t in his favor and bet big when they were. But what he didn’t know was exactly how big to bet to maximize his winning over time. So Thorp asked to meet with Claude Shannon to figure it out. Shannon pointed him to Kelly’s formula… and the rest is some of the greatest wealth-building history in the world.

To begin, they built the first wearable computer and used it to beat casinos at roulette!

Then Thorp took his winning math to the biggest casino of all: Wall Street.