Quant · Core
Kelly Criterion
Kelly is the stake that maximizes the expected log of wealth — an aggressive sizing rule that needs a true edge and a stomach.
Definition
For a bet with win probability p and payout b, f* = p − (1−p)/b. In continuous trading it is μ / σ². Full Kelly is noisy and can draw down hard. Half-Kelly is the usual compromise.
Why it matters
It links edge, odds, and size. Overbetting Kelly is how you go broke with a positive edge.
Case
A sportsbook or a prop desk that sizes full Kelly on a mis-estimated p. Variance of the estimator makes ‘optimal’ a blow-up.
How to read it
If you do not know p and b well, you do not have a Kelly number. Use a fraction and a max loss.
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