Kelly Criterion and Loans

ico2525 · 08-02-08, 01:56 AM

I know you posted this back in January, but this seems interesting. Firstly, Kelly's was originally meant to apply to casino games. Some blackjack card counters use it as a factor in determining how much to bet.

If you feel that you need more money to ensure a safe bankroll, that is one thing. In your specific example, no, don't get a loan from a bank. haha

I'd say if you're betting $1,000 on an average pick, but you only have access to $9,000, you need more money. If you're betting $2k per game, but you have $100k, going out of your way for an additional $50k is not effective in any sense. At that point Kelly's wouldn't even apply.

Thremp · 08-05-08, 12:13 PM

No love clam.

calm · 08-09-08, 10:51 AM

Yeah, maybe I stumped Ganchrow!? Head asplodes...

Data · 08-09-08, 09:01 PM

As far as I know the Kelly bankroll is defined as the following:
you net worth (including but not limited to specified cash on hand)
+future earnings (the best estimate, I suppose)
-financial obligations (including but not limited to loans and payments on loans)
-expenses for supporting desired lifestyle (a lot of things fall in this category)

Ganchrow · 08-11-08, 05:21 AM

Originally posted by calm

Let's assume...
I currently have $100,000 in cash.
I can borrow up to $50,000 at 7% APR.
I can increase my bankroll 10% per month.

So obviously it seems like a good idea to borrow the money, right? But then how do I apply kelly's formula? My net worth hasn't actually increased, but my cash on hand has.

It's all about properly setting up your utility function which can't be done given only the information you've provided.

For example:[list][*]What would happens (utility-wise) if you couldn't pay back the loan in full?[*]WHow would that compare with the utility of losing your entire $100K bankroll?[/QUOTE]