UNIT 3
Kelly Criterion
Kelly maximizes long-run logarithmic wealth when probabilities and payoffs are known.
Full KellyMax growthHigh volatility
A theoretical upper sizing reference for a repeatable edge.
- Comparing bet sizes
- Understanding overbetting
- Inputs are estimated
- Full Kelly can have severe drawdowns
Treating a fragile edge estimate as a known probability.
Kelly's mathematical result is exact under its assumptions; real-world inputs rarely are.
60-SECOND CHEAT SHEET
Remember this.
- 1f* = (bp − q) ÷ b
- 2Over Kelly reduces growth
- 3Estimate error matters