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Top positive review
139 people found this helpful
5.0 out of 5 starsFinally, a compendium of the most rigorous research (gamblers ruin based) on risky decisions
ByN N Talebon November 29, 2013
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...
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...
Top critical review
One person found this helpful
2.0 out of 5 starsLook Elsewhere
ByLibraryTech28on May 10, 2018
Needlessly detailed and does not give the investor a sound opinion or point of view on advantages versus the disadvantages of using and calculating trading capital with the Kelly criterion.
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5.0 out of 5 starsFinally, a compendium of the most rigorous research (gamblers ruin based) on risky decisions
ByN N Talebon November 29, 2013
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...
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...
139 people found this helpful
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Byrationalityon September 7, 2015
Excellent, bought it on Nassim's recommendation, quite tough for me though. Requires mathematical maturity.
ByLibraryTech28on May 10, 2018
Needlessly detailed and does not give the investor a sound opinion or point of view on advantages versus the disadvantages of using and calculating trading capital with the Kelly criterion.
ByPreston Pyshon February 10, 2017
Ed Thorp, Leonard Maclean, and William Ziemba wrote a masterpiece here. For me, this is a very important textbook because it captures the importance of position size. What many people in the financial world fail to recognize is the tethered relationship that exists between probability expectations and position size. This book doesn't just show the calculations for the Kelly criterion, but it also provides methods for trying to develop a good expected value for certain types of events and outcomes. If you're a serious investor, you would be crazy to pass on this book. For one reason, Ed Thorp is the living example of why the Efficient Market Hypothesis is false - simply look at his 227 months out of 230 for beating the market and you'll see what I'm talking about... Thank you for sharing this information gentleman!
ByMark L. Smithon October 21, 2017
Kindle version appears to be a bad OCR. The mathematical notation makes this problem glaring.
Byjohn hopkinson October 19, 2014
Complex but complete, covers fortunes formula from every angle
ByDavid Merkelon June 4, 2012
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.
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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