What you actually want is to maximize the growth rate of your bankroll. You can go broke making +EV bets. The Kelly Criterion is the solution you’re looking for for something like a lottery – a bet is “rational” iff the Kelly Criterion says you should make it.
Thanks, I’ve seen that mentioned before but didn’t really pay much attention.
I’m not sure how well it applies to something like a lottery (yes, I get the general point about percentage to put towards something but struggle with just how to assess the performance of the investment strategy part of the equation).
That said, in looking at the approach one thing that seems implied by the criteria is that the performance of the selected strategy seems to dominate a persons individual performance. I might have miscalculated though so wonder if you agree that would be a correct statement.
Yes, I think performance ultimately matters much more than risk preferences. If you really want to take that into account you can just define utility as a function of wealth, and then maximize the growth of utility instead. But I think risk-aversion has been way overemphasized by academics that weren’t thinking about ergodicity, and were thinking along St Petersburg Paradox lines that any +EV bet must be rational, so when people don’t take +EV bets they must be irrationally risk-averse.
What you actually want is to maximize the growth rate of your bankroll. You can go broke making +EV bets. The Kelly Criterion is the solution you’re looking for for something like a lottery – a bet is “rational” iff the Kelly Criterion says you should make it.
Thanks, I’ve seen that mentioned before but didn’t really pay much attention.
I’m not sure how well it applies to something like a lottery (yes, I get the general point about percentage to put towards something but struggle with just how to assess the performance of the investment strategy part of the equation).
That said, in looking at the approach one thing that seems implied by the criteria is that the performance of the selected strategy seems to dominate a persons individual performance. I might have miscalculated though so wonder if you agree that would be a correct statement.
Yes, I think performance ultimately matters much more than risk preferences. If you really want to take that into account you can just define utility as a function of wealth, and then maximize the growth of utility instead. But I think risk-aversion has been way overemphasized by academics that weren’t thinking about ergodicity, and were thinking along St Petersburg Paradox lines that any +EV bet must be rational, so when people don’t take +EV bets they must be irrationally risk-averse.