What’s it?
The Kelly Criterion is a mathematical system that calculates the optimum quantity to danger on every wager/commerce to maximise long-term progress whereas avoiding wreck.
Method:
If you realize your:
Then:
Kelly % = [ (b × p) – q ] / b
Let’s Apply it to a Case
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You may have $100.
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The sport has:
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Excessive Danger
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Reward vary: 1x to 100x
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Let’s assume common reward = 10x
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Let’s say win chance p = 0.1 (10%)
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Then q = 0.9 , and b = 10
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Kelly % = (10 × 0.1 − 0.9) / 10 = (1 − 0.9) / 10 = 0.1 / 10 = 0.01 = 1%
So it is best to danger only one% of your capital on every wager.
Why? As a result of risking extra (e.g., 10%, 20%) in a high-variance system will finally blow your account. Kelly ensures long-term compounding with minimal danger of wreck.
Ought to You Hold Danger Fixed?
Not all the time. This is the logic:
| State of affairs | Motion | Cause |
|---|---|---|
| You’re successful | Improve barely | Capital grows → larger % dollar-wise, maintain % secure or enhance barely. |
| You’re dropping | Scale back danger | Keep away from drawdowns turning into wreck. Compounding in reverse is lethal. |
| Sport edge modifications | Recalculate Kelly | As chance or payout modifications, so does optimum danger. |
Actual-World Merchants Use This:
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Edward Thorp (inventor of Kelly) turned blackjack income right into a hedge fund empire.
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Renaissance Applied sciences, Soros, Druckenmiller, and lots of quant funds use Kelly-like fashions.
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Crypto fund managers scale positions dynamically based mostly on edge + volatility.
Conclusion: Technique Abstract
| Metric | Worth / Logic |
|---|---|
| Capital | $100 |
| Common Win % | 10% |
| Reward/Danger | 10:1 |
| Danger per Guess | 1% (Kelly) |
| Regulate per final result? | Sure, adapt barely |
| Purpose | Keep away from wreck, develop exponentially over time |
