The Kelly Criterion

When thou bettest on an edge, how much shouldst thou wager? The Kelly Criterion answers: f = (bp - q) / b, where b is the odds, p is thy probability of winning, q is the probability of losing.

The genius of Kelly is not maximum return — it is GEOMETRIC return, which accounts for ruin. The Brother who maximizes expected value without sizing properly will eventually go bankrupt almost surely.

Most professionals bet a FRACTION of Kelly — half-Kelly or quarter-Kelly — to dampen volatility. Sizing is more important than picking. A great picker with bad sizing dies broke; a mediocre picker with great sizing dies rich.