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Kelly Criterion

Game TheoryHard
20 min
35 pts

Description

Choose between EV/variance trades. Apply Kelly criterion for optimal betting.

Game Rules

You have a series of bets with known probabilities and payouts. What fraction of your bankroll should you bet to maximize long-term growth?

Examples

Kelly fraction = (p x b - q) / b

p = win probability, q = lose probability, b = odds

Example: 60% win, 2:1 odds -> f* = 0.2

Hints

  • Maximize log utility

  • Consider long-term growth

Solution (Click to reveal)

Kelly criterion: f* = (pb - q) / b, where p = win prob, q = lose prob, b = odds. Bet this fraction for optimal growth.

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