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43 of 46 people found the following review helpful
5.0 out of 5 stars Finally, a compendium of the most rigorous research (gamblers ruin based) on risky decisions, November 29, 2013
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There are two methods to consider in a risky strategy.

1) The first is to know all parameters about the future and engage in optimized portfolio construction, a lunacy unless one has a god-like knowledge of the future. Let us call it Markowitz-style. In order to implement a full Markowitz- style optimization, one needs to know the entire joint probability distribution of all assets for the entire future, plus the exact utility function for wealth at all future times. And without errors! (I have shown that estimation errors make the system explode.)

2) Kelly's method (or, rather, Kelly-Thorpe), developed around the same period, which requires no joint distribution or utility function. It is very robust. In practice one needs to estimate the ratio of expected profit to worst- case return-- dynamically adjusted to avoid ruin. In the case of barbell transformations, the worst case is guaranteed (leave 80% or so of your money in reserves). And model error is much, much milder under Kelly criterion. So, assuming one has the edge (as a sole central piece of information), engage in a dynamic strategy of variable betting, getting more conservative after losses ("cut your losses") and more aggressive "with the house's money". The entire focus is the avoidance of gambler's ruin.

The first strategy was only embraced by academic financial economists --empty suits without skin in the game -- because you can make an academic career writing BS papers with method 1 much better than with method 2. On the other hand EVERY SURVIVING speculator uses explicitly or implicitly method 2 (evidence: Ray Dalio, Paul Tudor Jones, Renaissance, even Goldman Sachs!) For the first method, think of LTCM and the banking failure.

Let me repeat. Method 2 is much, much, much more scientific in the true sense of the word, that is rigorous and applicable. Method 1 is good for "job market papers" . Now this book presents all the major papers for the second line of thinking. It is almost exhaustive; many great thinkers in Information theory and probability (Ed Thorpe, Leo Breiman, T M Cover, Bill Ziemba) are represented... even the original paper by Bernouilli.

Buy 2 copies, just in case you lose one. This book has more meat than any other book in decision theory, economics, finance, etc...
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22 of 29 people found the following review helpful
4.0 out of 5 stars Another Book Review from the Aleph Blog, June 4, 2012
By 
David Merkel "Aleph Blog" (Ellicott City, MD United States) - See all my reviews
(REAL NAME)   
This review is from: The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic Series) (Hardcover)
I have not read this book. I read almost all books that I review, so I disclose when I have merely scanned a book such as this.

Why scan? First, I didn't ask for the book. Second, it is 800+ pages long. Third, it is a series of academic articles defending and attacking the Kelly Criterion -- it will have a very specific audience that cares about the academic side of the debate. The popular side is covered by the book, "Fortune's Formula," which I have favorably reviewed here.

The simple way to phrase the argument for the Kelly Criterion is this: you have an advantage versus the markets for whatever reason. You have an edge on average, and the odds are tilted in your favor. You size your bets as a ratio of edge over odds. If your edge is durable, and the odds are calculated right, the optimal decision leads to the best compound growth of capital on average.

Samuelson sits in his ivory tower, where only efficient markets exist. Those of us that are practitioners know that the markets are hard, but not efficient.

To me, the Kelly Criterion is intuitive, whereas the ideas of Modern Portfolio Theory are a stretch. They don't fit the way the market operates.

Who would benefit from this book: If you are really interested in the Kelly Criterion debate , and are willing to pay up to get a good summary of the debate, it is available here. Note: you have to like math.
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