5 ms·

The the main flaw of the kelly criterion (along with a number of other results in investment theory like Markowitz allocation) is that in practice it's extremel

The the main flaw of the kelly criterion (along with a number of other results in investment theory like Markowitz allocation) is that in practice it's extremely difficult to know the distribution of the result you're betting on. The mean and variance of a prospective investment are not observable. But more to the point, if you try to use some sort of proxy like a sample mean or standard deviation, you'll get inconsistent results over time. We're a long way from the clean, simple, i.i.d world that theorists like to play in.

miketery 8y ago
In such cases what are models that are more effective?
- soVeryTired 8y ago
  I don't know of anything that's guaranteed to be effective out of the box. But as a rule, simpler is better. Any assumptions should be picked apart with a fine-tooth comb and tested for robustness. But in the end, there's not a whole lot that you can do: just cross your fingers and hope.
- iopq 8y ago
  You could probably model something that uses sampled variance less aggressively
  - sjg007 8y ago
    Something bayesian
downandout 8y ago
in practice it's extremely difficult to know the distribution of the result you're betting on. This of course depends on your use case. For example, the Kelly Criterion is a staple of advantage gambling. For most casino games, probability distribution can be easily calculated with absolute accuracy. I'm sure there are other use cases for it where probability distribution is also fairly stable.
- fjsolwmv 8y ago
  Does Kelly work when "ruin" is not such a clear cut permanent barrier? I can be "ruined" today but have more money next payday.
  - downandout 8y ago
    This would be less a Kelly issue and more an issue of the bankroll variable you're using. Advantage gamblers generally find the concept of "sessions" meaningless - essentially, one's entire gambling career is just one long session. So if for example you have $1K per week of expendable income that you wish to use for the bankroll, and you're willing to risk that amount for a year, then you'd likely want to approach the Kelly calculation with a $52K bankroll. You would have wild swings within that year, and very short sessions when you lost (because you couldn't play again until your next paycheck), but you would still be betting the correct amount for the total risk you're willing to take.
pyrex41 8y ago
This is also an argument for finding investments that allow you to better define the downside risk of investments. I think that this is why static investments or hedges have such value; they may not change the expected value, they might even reduce it (based on mean estimates), but they reduce / eliminate the estimation error in your downside risk, allowing you a much more certain calculation of leverage.
- aidenn0 8y ago
  Insurance in general has a reduced expected value while also hedging against downside risk.

miketery 8y ago

In such cases what are models that are more effective?

soVeryTired 8y ago
I don't know of anything that's guaranteed to be effective out of the box. But as a rule, simpler is better. Any assumptions should be picked apart with a fine-tooth comb and tested for robustness. But in the end, there's not a whole lot that you can do: just cross your fingers and hope.
iopq 8y ago
You could probably model something that uses sampled variance less aggressively
- sjg007 8y ago
  Something bayesian

downandout 8y ago

in practice it's extremely difficult to know the distribution of the result you're betting on. This of course depends on your use case. For example, the Kelly Criterion is a staple of advantage gambling. For most casino games, probability distribution can be easily calculated with absolute accuracy. I'm sure there are other use cases for it where probability distribution is also fairly stable.

fjsolwmv 8y ago
Does Kelly work when "ruin" is not such a clear cut permanent barrier? I can be "ruined" today but have more money next payday.
- downandout 8y ago
  This would be less a Kelly issue and more an issue of the bankroll variable you're using. Advantage gamblers generally find the concept of "sessions" meaningless - essentially, one's entire gambling career is just one long session. So if for example you have $1K per week of expendable income that you wish to use for the bankroll, and you're willing to risk that amount for a year, then you'd likely want to approach the Kelly calculation with a $52K bankroll. You would have wild swings within that year, and very short sessions when you lost (because you couldn't play again until your next paycheck), but you would still be betting the correct amount for the total risk you're willing to take.

pyrex41 8y ago

This is also an argument for finding investments that allow you to better define the downside risk of investments. I think that this is why static investments or hedges have such value; they may not change the expected value, they might even reduce it (based on mean estimates), but they reduce / eliminate the estimation error in your downside risk, allowing you a much more certain calculation of leverage.

aidenn0 8y ago
Insurance in general has a reduced expected value while also hedging against downside risk.