Two tales of the Kelly formula

Kelly’s formula is a theoretical benchmark for deciding the appropriate position size when gambling. A divergence in attitude towards this theory illustrates the disconnect between academicians and practitioners, and the necessity of closer collaboration between the two circles, a point we argued in The Two Towers of Finance.

To understand the essence of Kelly’s formula, let us consider the question: Can one lose money in a game in which one has a favorable probability of winning? The answer is, absolutely yes. To see why, think of the simple game of tossing a biased coin: heads means that the player wins

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The two towers of finance

Most fresh graduates from business schools and mathematical finance programs quickly awake to a shocking realization: Very little of what they learned during their studies is applied in the real world. There is a disconnect between the academics and practitioners of finance. Very few practitioners get involved in academic activity, and some academics consider practical experience as beneath them, something that would pollute their credentials.

It is a fascinating state of affairs, without much parallel in other disciplines. Most physicists and many mathematicians regularly get involved in solid applied mathematical projects, often working in laboratories side by side with biologists,

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Welcome to the Mathematical Investor blog

This blog, and the associated MAFFIA website, are devoted to research in financial mathematics, computational aspects of financial mathematics, and the larger realm of computing, science and society. In this blog, we will especially focus on helping readers distinguish between rigorously established mathematical finance techniques, and the unfortunately much larger body of highly questionable techniques that sadly pervade the financial community and financial news.

We plan to post items regularly to this blog, with a frequency of once a month or so, for the indefinite future.


Please read this Overview of the Mathematical Investor blog, which outlines its scope

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