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> I haven't even found an explanation of why uncertainty about probabilities requires betting more conservatively than Kelly would recommend. It’s because the
by proamdev123 3y ago
> I haven't even found an explanation of why uncertainty about probabilities requires betting more conservatively than Kelly would recommend.
It’s because the risk of ruin increases quickly if you overestimate optimal f, as calculated by Kelly criterion. So OVER-estimating f, dramatically increases your risk of bankruptcy, while UNDER-estimating f only results in not optimizing your returns.
If you’re not certain of your probabilities because (you’re estimating unknowns), you’d prefer having sub-optimal gains over going bankrupt.
- cubefox 3y agoI guess something like that is indeed the reason. However, as stated (in terms of "risk of ruin") the argument doesn't quite work. Because even if the probabilities are known with certainty, betting the Kelly optimum would increase the risk of ruin compared to betting less. But Kelly betting would nonetheless be better.