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Thread: Kelly Criterion

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    Kelly Criterion

    Yesterday, as part of an overall medical strategy to help me discipline myself with some health concerns, I spent about 40 minutes with a psychologist. The back and forth conversation produced, towards the end, a 30 second remark by the psychologist which was essentially - to utilize the same discipline used at blackjack, and apply same to an exercise and diet program. How simple and compelling.

    We went on a tangent, which included a blurb by me regarding discipline and Kelly criterion. I linked to a short and informative video which I emailed to the fellow. I thought it was interesting enough to share here.

    https://m.youtube.com/watch?v=eQIaX88cbq8

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    Nice link, but unfortunately no supporting graphics in this "video", it's just merely audio. If I understood the example correctly, the player betting on the more frequent side of the coin had a winning chance of 60 percent and a losing chance of 40 percent in every toss. Since the difference is 20 percent, 20 percent is the edge on betting on the more frequent side of the coin, and thus 1/5 is the proportion of the 25 dollar bankroll which the player should bet at the start of the experiment (in this case 5 dollars). After each coin toss, the bet should be adjusted to one fifth of the current bankroll. For instance, if the player won the first bet, he has now 30 dollars, of which he should bet 6 dollars for the next toin coss. If he lost the first bet, he has now only 20 dollars, of which he should bet 4 dollars for the next toin coss, and so forth.

    (It is plausible that theoretically the player could never go bankrupt, since a losing streak would decrease his bankroll asymptotically towards zero. It is an exponential function with base 0.8, the bankroll formula for losing every bet being f(t) = 25 * 0.8^t . Of course he cannot bet less than 1 cent, so there are practical restrictions to this model).
    Last edited by PinkChip; 07-16-2019 at 04:35 PM.

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    Quote Originally Posted by PinkChip View Post
    Nice link, but unfortunately no supporting graphics in this "video", it's just merely audio. If I understood the example correctly, the player betting on the more frequent side of the coin had a winning chance of 60 percent and a losing chance of 40 percent in every toss. Since the difference is 20 percent, 20 percent is the edge on betting on the more frequent side of the coin, and thus 1/5 is the proportion of the 25 dollar bankroll which the player should bet at the start of the experiment (in this case 5 dollars). After each coin toss, the bet should be adjusted to one fifth of the current bankroll. for instance, if the player won the first bet, he has now 30 dollars, of which he should bet 6 dollars for the next toin coss. If he lost the first bet, he has now only 20 dollars, of which he should bet 4 dollars for the next toin coss, and so forth.

    (It is plausible that theoretically the player could never go bankrupt, since a losing streak would decrease his bankroll asymptotically towards zero. It is an exponential function with base 0.8, the bankroll formula for losing every bet being f(t) = 25 * 0.8^t . Of course he cannot bet less than 1 cent, so there are practical restrictions to this model).
    All correct. The interesting point, which came near the beginning, is when you present this experiment to a group of college students, the vast majority bet in the most stupid and inefficient ways possible!

    Don

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