Kelly criterion

Kelly criterion — the formula for the bankroll fraction that maximizes long-run growth when you know your edge and odds. This course uses its three qualitative lessons rather than the formula: (1) bet size should scale with edge and with certainty about that edge — and you have less of both than you feel, especially mid-mania; (2) betting more than Kelly prescribes doesn’t just add risk, it mathematically destroys long-run growth even when the edge is real — over-betting good bets is how winners go broke; (3) when the edge is unknowable, the honest Kelly fraction is near zero — which is why the speculative sleeve is capped at 5–10% rather than “conviction-weighted.”

First used in: 2.5 · The speculative sleeve