Optimal Trade Sizing in a Game with Favourable Odds: The Stock Market
4 Pages Posted: 2 Dec 2016 Last revised: 5 Dec 2016
Date Written: November 25, 2016
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: Suggested Citation