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I beg to differ. It is appropriate only in certain, special circumstances. It is misapplied and misunderstood, and though I respect the work of those you cite,
by rvince 17y ago
I beg to differ. It is appropriate only in certain, special circumstances. It is misapplied and misunderstood, and though I respect the work of those you cite, but it does NOT yield the growth optimal fraction in trading unless two specific criteria occur (aside from a positive expectation). Peculiarly, it has not been illuminated for what it is and when it is applicable -- an absence of critical thinking on the part of its proponents have promulgated an enormous degree of disinformation out there. Regularly, I would get called in by hedge funds and witness this firsthand. Sorry I cannot be more specific about this at this time -- I will be in the coming months, suffice to say for the time being that one must be extremely careful if they think that the Kelly Criterion is giving them the optimal fractin to risk in trading. More often than not, it is giving them something different and very dangerous.
- jmount 17y agoFirst, I really appreciate your politeness in the discussion. One huge mis-use I can think of in using a Kelly type system would be to use past frequencies directly as your probabilities. At best this would give you the CAPM and at worst it would give you a disastrous "momentum trade" strategy. The Kelly System is a little sneaky in that it assumes you have good estimates of the probabilities of future events. So when the system fails it can turn around and say that you had bad estimates or un-modeled dependencies.