The Kelly Criterion:
Fallacy or Kuhnian Paradigm Shift Waiting to Happen?
Figure 1. Pascal’s triangle. From Fortune’s Formula.
Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.
By William Poundstone, Hill and Wang, New York, 2005, 400 pages, $27.00.
William Poundstone is the author of nine previous books, including Carl Sagan: A Life in the Cosmos and Prisoner’s Dilemma. Despite—or possibly because of—his lack of scientific credentials, Poundstone seems to be drawn to scientifically controversial subjects. The formula of the title—which is intended to parlay modest sums of money into veritable fortunes, with minimal waste of time, by means of an appropriate sequence of wagers—is certainly controversial. Despite years of success at racetracks, in casinos, and on Wall Street, it has been denounced as “a fallacy” by some of the 20th century’s most celebrated economists. Claude Shannon and John Kelly discovered the formula at Bell Labs, in 1956.
Athough Poundstone seems to be convinced that the formula is the product of a genuine collaboration, the original paper  on the subject was written by Kelly alone. An earlier version, which spoke openly of bookies and insider information, had been declared unacceptable by AT&T management, which was never keen to advertise the fact that bookies long represented an embarrassingly large fraction of the firm’s customer base. As a result, Shannon found himself serving as an “anonymous” in-house referee, helping Kelly to prepare a suitably sanitized version of what both considered joint research, for publication in the firm’s own Bell System Technical Journal.
MORE- http://sinews.siam.org/old-issues/2006/april-2006/the-kelly-criterion-fallacy-or-kuhnian-paradigm-shift-waiting-to-happen/ (Archive copy)