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The way to reduce variance is to keep some of your wealth out of the equation. In other words, put half of your money to the side, and then apply the Kelly crit
by kqr 5y ago
The way to reduce variance is to keep some of your wealth out of the equation. In other words, put half of your money to the side, and then apply the Kelly criterion to that which remains.
This is a "fractional Kelly" strategy, which optimises growth under the condition that you want to reduce variance.
- joosters 5y agoYes. The 'fully Kelly' betting is the fastest growth, but the variance is sky-high in practice. If I remember the math right, while betting using full Kelly stakes, you will have a 50% chance of losing half of your current bank at some point in the future. Most people (rightly or wrongly) don't have the stomach for such wild swings in fortune, and so using reduced stakes will lead to less variance while still being profitable. Also, in the real world, you never accurately know how big your % edge actually is, so there's a real chance that you are over-betting when using Kelly stakes. Using reduced stakes is a way to compensate for this.