(If someone would be willing to walk me through a few examples and show me where all the numbers in the equation come from, I’d be very grateful.)
This would make for a really long comment—about a thousand words (explaining how to derive it). It should probably be a post instead, and in order to be readable, the writer would have to know how to make math formulas render properly instead of just being text. I do not know how to do that last thing, so
The short version is:
The Kelly Criterion is a supposed to be a guide to “optimal betting” for an infinite number of bets, if you have the utility function U = ln(M), where M is how much money you have. The wikipedia page isn’t very helpful about the derivation anymore, but it has a link to what it says is the original paper: http://www.herrold.com/brokerage/kelly.pdf.
The Kelly criterion is helpful when losing your entire bankroll is worse than other outcomes.
This is because log($0) = - infinity utilons. If you don’t think being broke is the worst thing that could happen to you, this might not be your exact utility function.
Thanks! I do get the purpose/idea behind kelly criterion, but I don’t get how to actually do the math, nor how to intuitively think about it when making decisions the way I intuitively think about expected value.
This would make for a really long comment—about a thousand words (explaining how to derive it). It should probably be a post instead, and in order to be readable, the writer would have to know how to make math formulas render properly instead of just being text. I do not know how to do that last thing, so
The short version is:
The Kelly Criterion is a supposed to be a guide to “optimal betting” for an infinite number of bets, if you have the utility function U = ln(M), where M is how much money you have. The wikipedia page isn’t very helpful about the derivation anymore, but it has a link to what it says is the original paper: http://www.herrold.com/brokerage/kelly.pdf.
This is because log($0) = - infinity utilons. If you don’t think being broke is the worst thing that could happen to you, this might not be your exact utility function.
Thanks! I do get the purpose/idea behind kelly criterion, but I don’t get how to actually do the math, nor how to intuitively think about it when making decisions the way I intuitively think about expected value.
Are you familiar with derivatives, and the properties of logarithms?
I am familiar with derivatives. I don’t remember the properties of logarithms but I half remember the base change one :).