Escaping the odds and a formula for life (2024)
5 days ago
- #Compound Growth
- #Optimal Betting
- #Kelly Criterion
- The article discusses the Kelly Criterion, a mathematical formula for optimal betting strategies that maximizes long-term growth.
- Originating from John L. Kelly Jr.'s work at Bell Labs, the criterion balances risk and reward by determining the fraction of one's bankroll to bet based on the probability of winning and the odds.
- The Kelly Criterion is not limited to gambling; it applies to finance, investing, and even personal decision-making, emphasizing the importance of geometric growth and compound returns.
- The author's journey to understand the Kelly Criterion involved exploring its mathematical foundations, including the difference between arithmetic and geometric means and the role of logarithmic utility in penalizing large losses.
- Practical applications of the Kelly Criterion include diversifying bets to avoid ruin and adjusting bet sizes based on confidence in predictions, highlighting its relevance beyond theoretical finance.
- The narrative concludes by framing the Kelly Criterion as a philosophy for life, advocating for long-term, compounding growth in wealth, skills, and relationships over short-term gains.