Sunday, November 18, 2012

"The Kelly Criterion and the Importance of Money Management"

I just realized I've never written about the Kelly Criterion, the formula developed by J.L. Kelly that can be used to determine the optimal size of a series of bets. But start with this essay by Mauboussin, "Size Matters",

"[I]f you bet too little, you won’t take advantage of a clearly positive expected-value opportunity. On the other hand, if you bet everything, you risk losing all of your money. Money management is all about determining the right amount of capital to allocate to an investment opportunity, given the edge and the frequency of such opportunities."
Also read about Ed Thorp. More on this later. And Stableboy is on to something here.

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