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Mathematics of cube decisions relative to bankroll

Posted By: Bob Koca
Date: Monday, 13 May 2013, at 4:51 p.m.

In Response To: Mathematics of cube decisions relative to bankroll (Bob Koca)

Consider the following two investors.

Investor A has a logarithmic utility function and has a favorable bet and is deciding what fraction of his fortune to wager. The bet only occurs a single time.

Investor B has a linear utility function and has that same favorable bet. But that bet is going to recur every day. The bettor wishes to obtain the highest long term growth rate.

The Kelly criterion was developed to answer the question for bettor B. The answer it gives for person A just happens to be the same answer as for person B. But if person A wishes to obtain the highest long term utility growth rate something else is needed.

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