One interesting thing with the Kelly Criterion is that it sort of necessarily shows you the importance of diversification.
Even with insanely good odds, you never bet a huge amount of your bankroll
Even with insanely good odds, you never bet a huge amount of your bankroll
https://twitter.com/TaylorPearsonMe/status/1401248113512353794
(I did a short explanation of Kelly here if you're unfamiliar)
https://twitter.com/TaylorPearsonMe/status/1116789716274360322
Here's an insane example:
You have a bet which pays 100 to 1 and you are 80% sure that you are correct, how much should you bet?
(Try to pick a % of your assets/bankroll in your head)
You have a bet which pays 100 to 1 and you are 80% sure that you are correct, how much should you bet?
(Try to pick a % of your assets/bankroll in your head)
The "Full Kelly" answer is 79.8%.
However, going full Kelly in real life is insane.
Half Kelly is very aggressive.
Most practitioners I know of use quarter kelly.
(This has to do wit the marginal risk/profit as you move out the Kelly Curve as @NickYoder86 shows here)
However, going full Kelly in real life is insane.
Half Kelly is very aggressive.
Most practitioners I know of use quarter kelly.
(This has to do wit the marginal risk/profit as you move out the Kelly Curve as @NickYoder86 shows here)
At half Kelly, the suggested allocation is ~40%
At quarter Kelly, it's ~20%.
I picked this example (80% confidence of 100 to 1 odds) because it's the most extreme example I could think of - most people will never see this and, at most, you would see it 1-3 times in a lifetime.
At quarter Kelly, it's ~20%.
I picked this example (80% confidence of 100 to 1 odds) because it's the most extreme example I could think of - most people will never see this and, at most, you would see it 1-3 times in a lifetime.
I think it's a reasonable rule of thumb that you should basically never allocate more than ~25% to any single bet if your goal is to maximize long-term wealth.
Necessarily, this means you need to spread your bets out more than intuitively seems right even when you have amazing odds and high confidence!
(And, yes, I am subtweeting a bunch of crypto people)
(And, yes, I am subtweeting a bunch of crypto people)
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