Beating The Risk Of Ruin

At lower odds, it would take a significant increase in payoff for Kelly to recommend that you put capital at risk. Favorable odds with lower edges still result in a recommendation for capital allocation, albeit small amounts, under Kelly. So do massive payoff (an edge of 4 – a 400% return) with unfavorable odds (30% chance of winning, 70% chance of losing). It is likely that your estimates are off and have a strong bias towards a direction that would make you commit to the bet.

Intelligent Betting

As previously mentioned, the Kelly Criterion is used in the sports betting industry to estimate what percentage of profit or bankroll to invest to maximize the return rate. Since it relies on statistical probabilities, inquiry the Kelly Criterion is a scientifically-proven betting strategy. When employed correctly, the Kelly Criterion helps you limit your losses and of course, maximize your long-term gains. In this sense, the Kelly Criterion is excellent money management and money allocation system.

Nassim Explains The Kelly Criterion

I plotted out the Kelly bet for a bunch of random investments and noticed the Kelly bet did not match up with the position size I would have expected for the portfolio. This is because the Kelly bet was not considering the portfolio. However, I did find that expected return was a good predictor of portfolio position size . Yes, your Sharpe ratio changes with the volatility of returns. That’s why a corollary of the Kelly criterion requires you to rebalance your portfolio constantly. The continuity comes from the continuity of prices – a “loss” can be perceived as a continuous range of outcomes where your exit price is less than your entry price.

Instead of calculating the largest side of a right-angle triangle, though, this method calculates a team’s performance from the previous year. One of the most important things both savvy punters and oddsmakers utilize is data and trend analysis software. These days there are several online options that offer these services for free or for a low fee. It takes a bit of work to learn to use them at first but once you learn how to use these tools they can be an absolute game-changer for your results.

Is The Kelly Criterion Effective?

Many of the portfolios lose more than half their money by the end. We’ll have to make some highly simplifying assumptions , but Kelly can help give us some idea of how much to allocate per investment. Since you have no edge, and the risk/reward is sized correctly, the best option is to not bet.

To quantify your performance with any betting system, it is smart to chart your picks and keep track of the amounts won and lost in each wager, to stay informed on how each system is working for you. Kelly’s criterion maximizes the theoretical maximum amount of wealth as the number of bets goes to infinity. You can look at this as optimizing the expected geometric growth rate, or the expected value of the logarithm of wealth. There’s a rigorous proof that fits on a single page, but I’ll spare you the details.

We find that most tipsters satisfy simple performance criteria. However, they do not fully exploit publicly available information and only two appear to successfully use independent information relevant to match outcomes. Therefore, according to the Kelly Criterion we should bet 13% of our bankroll on this bet.