Preface – The Kelly Capital Growth Investment Criterion: Theory and Practice

World Scientific Handbook in Financial Economic Series, Vol. 3, 2011

2 Pages Posted: 30 May 2011

See all articles by Edward O. Thorp

Edward O. Thorp

University of California, Irvine

Leonard MacLean

Dalhousie University - School of Business Administration

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business

Date Written: February 10, 2011

Abstract

This volume provides the definitive treatment of fortune's formula or the Kelly capital growth criterion as it is often called. The strategy is to maximize long run wealth of the investor by maximizing the period by period expected utility of wealth with a logarithmic utility function. Mathematical theorems show that only the log utility function maximizes asymptotic long run wealth and minimizes the expected time to arbitrary large goals. In general, the strategy is risky in the short term but as the number of bets increase, the Kelly bettor's wealth tends to be much larger than those with essentially different strategies. So most of the time, the Kelly bettor will have much more wealth than these other bettors but the Kelly strategy can lead to considerable losses a small percent of the time. There are ways to reduce this risk at the cost of lower expected final wealth using fractional Kelly strategies that blend the Kelly suggested wager with cash. The various classic reprinted papers and the new ones written specifically for this volume cover various aspects of the theory and practice of dynamic investing. Good and bad properties are discussed, as are fixed-mix and volatility induced growth strategies. The relationships with utility theory and the use of these ideas by great investors are featured.

Keywords: Kelly Criterion, Dynamic Investment Analysis, Capital Growth Theory, Sports Betting, Hedge Fund Strategies, Speculative Investing, Fortune's Formula

Suggested Citation

Thorp, Edward O. and MacLean, Leonard and Ziemba, William T., Preface – The Kelly Capital Growth Investment Criterion: Theory and Practice (February 10, 2011). World Scientific Handbook in Financial Economic Series, Vol. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1854027

Edward O. Thorp

University of California, Irvine ( email )

Campus Drive
Irvine, CA 62697-3125
United States

Leonard MacLean

Dalhousie University - School of Business Administration ( email )

Halifax, Nova Scotia B3H 4R2
Canada

William T. Ziemba (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)

HOME PAGE: http://williamtziemba.com

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