Kelly Criterion: Fallacy or Kuhnian Paradigm Shift?

[zengrifter]

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 [2] 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)

 

[sagefr0g]

ok where they say "has been denounced as “a fallacy” by some of the 20th century’s most celebrated economists..." what is their arguement against the veracity of the Kelly Criterion?
uhmm i just skim read the article.... did i miss their explaination?
and another question regarding the Kelly Criterion, has it been proven that the approach is the most ideal or ultimate way to grow one's bankroll?

 

[jack.jackson]

Definitely some pretty deep stuff. I'll probably have to read 2 or 3 more time Befor I really understand it.
_______________________________________________________________

Quote of the day:One day, when I am gone, and all that's left of me, is my words, then none of this will matter.:eyepatch:

 

[zengrifter]

ok where they say "has been denounced as “a fallacy” by some of the 20th century’s most celebrated economists..." what is their arguement against the veracity of the Kelly Criterion?
uhmm i just skim read the article.... did i miss their explaination?
and another question regarding the Kelly Criterion, has it been proven that the approach is the most ideal or ultimate way to grow one's bankroll?

Get the whole story here, quite a book! -

Product Description

Amazon.com
Fortune's Formula is a fascinating study of the connections between such seemingly unrelated topics as gambling, information theory, stock investing, and applied mathematics. The story involves the stunning brainpower of men such as MIT professor Claude Shannon, who single-handedly invented information theory, the science behind the Internet and all digital media; Ed Thorpe; and John Kelly of Bell Laboratories, who developed the "Kelly criterion," a now-legendary investment strategy for maximizing growth while controlling risk. Initially, Shannon and Thorpe took Kelly's theory to Las Vegas and applied it to roulette and blackjack. Later, they took it to Wall Street and cleaned up--Shannon made a personal fortune while Thorpe created the highly successful hedge firm Princeton-Newport Partners. They both discovered that Kelly's system was particularly effective when applied to arbitrage (minute price differences that result from market inefficiencies). As Poundstone ably demonstrates, the merits of Kelly's criterion are still hotly debated today.
Poundstone has a tendency to meander in his writing, but his asides are so revealing and interesting that they add, rather than detract, from the narrative. The book also includes a cast of fascinating and colorful characters as varied as Ivan Boesky, Warren Buffet, Rudolph Giuliani, and notorious mobsters such as Bugsy Siegel and Meyer Lansky. In explaining the lasting impact of the work done by Shannon, Thorpe, and Kelly, Poundstone even explains Kelly's system for those wishing to follow his formula, offering readers both theoretical and practical lessons. Whether viewed as a how-to guide or straight scientific and financial history, Fortune's Formula proves an entertaining and illuminating analysis of "the most successful gambling system of all time." --Shawn Carkonen --This text refers to an out of print or unavailable edition of this title.

From Publishers Weekly
In 1961, MIT mathematics professor Ed Thorp made a small Vegas fortune by "counting cards"; his 1962 bestseller, Beat the Dealer, made the phrase a household word. With Claude Shannon, the father of information theory, Thorp next conquered the roulette tables. In this prosaic but fascinating cultural history, Poundstone (How Would You Move Mt. Fuji?) tells not only what they did but how they did it. For roulette, Poundstone shows, Thorp and Shannon used a betting scheme invented by Shannon's Bell Labs colleague John Kelly, eventually applying Kelly's technique to investing, resulting in long-term records of extraordinary return with low risk. (Thorp revealed the secret in 1966's Beat the Market, but investors proved harder to persuade than blackjack players.) Many other characters figure into Poundstone's entertaining saga: a forgotten French mathematician, two Nobel Prize–winning economists who declared war on the Kelly criterion, Rudy Giuliani, assorted mobsters, and winners and losers in all types of investing and gambling games. The subtitle is not a tease: the book explains and analyzes Kelly's system for turning small advantages into great wealth. The system works, but requires unusual amounts of patience, discipline and courage. The book is good fun for the rest of us.

Copyright © Reed Business Information

 

[SPX]

I picked the book up yesterday. I've only gotten as far as pg. 20 but interesting stuff thus far!

The writer has an easy-to-read style that--like many reviewers on Amazon have said--makes non-fiction read almost like a novel. (But not in a Ben Mezrich sort of way.)

 

[darco77]

Get the whole story here, quite a book! -

Easily the most enjoyable book I've ever read. Mobsters, math geeks, blackjack, hedge funds, and overzealous NY prosecutors (no, not Client-9). I'm currently re-reading it.

 

[Guynoire]

I've read the book too and it's definitely a fun read if you're interested in things like blackjack, hedge funds or mathematics.

 

[zengrifter]

See also - Thorp, Kelly, and the Looming Collapse of Wall Street
​

 

[zengrifter]

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 [2] 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)

Link has changed to PDF doc - http://www.siam.org/pdf/news/930.pdf