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Example of the optimal Kelly betting fraction, versus expected return of other fractional bets. In probability theory, the Kelly criterion (or Kelly strategy or Kelly bet) is a formula for sizing a sequence of bets by maximizing the long-term expected value of the logarithm of wealth, which is equivalent to maximizing the long-term expected geometric growth rate.
The Kelly criterion was used by horse racing gamblers in the late 1950s. Today, Warren Buffet and others use it for investing purposes. Before addressing your …
In probability theory, Proebsting's paradox is an argument that appears to show that the Kelly criterion can lead to ruin. Although it can be resolved mathematically, it raises some interesting issues about the practical application of Kelly, especially in investing. It was named and first discussed by Edward O. Thorp in 2008. [1]
Kelly betting or proportional betting is an application of information theory to investing and gambling. Its discoverer was John Larry Kelly, Jr. Part of Kelly's insight was to have the gambler maximize the expectation of the logarithm of his capital, rather than the expected profit from each bet. This is important, since in the latter case ...
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Thorp wrote many articles about option pricing, Kelly criterion, statistical arbitrage strategies (6-parts series), [18] and inefficient markets. [19] In 1991, Thorp was an early skeptic of Bernie Madoff's supposedly stellar investing returns which were proved to be fraudulent in 2008. [20]
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