Optimal Trade Sizing in a Game with Favourable Odds: The Stock Market

4 Pages Posted: 2 Dec 2016 Last revised: 5 Dec 2016

Victor Haghani

Elm Partners

Andrew Morton

Citigroup, Inc. - Citigroup Global Markets

Date Written: November 25, 2016

Abstract

In this short note, we show investors one way to calculate ideal investment sizing by using two rules of thumb based on a simple outline of individual risk aversion. We illustrate these two heuristics, which are not widely appreciated, with thought experiments involving coin flips and ketchup & French fries, which we hope will make these results easy to recall and apply well after reading this note. We conclude by posing other questions that this simple framework can be used to explore.

Keywords: Decision Making under Uncertainty, Risk, Uncertainty, Utility, Risk Aversion, Kelly, Coin Flip, Heuristics, Rules of Thumb, Behavioral Finance, Market Timing, Gamblers Fallacy, St. Petersburg Paradox, Gambling, Betting, CRRA

JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23

Suggested Citation

Haghani, Victor and Morton, Andrew, Optimal Trade Sizing in a Game with Favourable Odds: The Stock Market (November 25, 2016). Available at SSRN: https://ssrn.com/abstract=2875682

Victor Haghani (Contact Author)

Elm Partners ( email )

1630 Willow View Drive
PO Box 1417
Wilson, WY 83014

HOME PAGE: http://www.elmfunds.com

Andrew Morton

Citigroup, Inc. - Citigroup Global Markets ( email )

399 Park Avenue
6th Floor
New York, NY 10043
United States

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