Subtle Price Discrimination and Surplus Extraction Under Uncertainty
California State Polytechnic University, San Luis Obispo - Economics
March 31, 2013
In this paper I provide a solution to Proebsting’s Paradox, an argument that appears to show that the investment rule known as the Kelly criterion can lead a decision maker to invest a higher fraction of his wealth the more unfavorable the odds he faces are and, as a consequence, risk an arbitrarily high proportion of his wealth on the outcome of a single event. I show that a large class of investment criteria, including ’fractional Kelly,’ also suffer from the same shortcoming and adapt ideas from the literature on price discrimination and surplus extraction to explain why this is so. I also derive a new criterion, dubbed the doubly conservative criterion, that is immune to the problem identified above. Immunity stems from the investor’s attitudes towards capital preservation and from him becoming rapidly pessimistic about his chances of winning the better odds he is offered.
Number of Pages in PDF File: 15
Keywords: Kelly criterion, risk management, asset allocation, betting rules, price discrimination, expected utility theory
JEL Classification: D11, D81working papers series
Date posted: May 26, 2009 ; Last revised: May 24, 2013
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.438 seconds