The Kelly Criterion: the application of information theory to horse racing
by Caley Finn
Abstract: In his 1956 paper, Kelly imagined a gambler with a secret channel
telling him the outcome of races - with perfect communication, the
gambler could wager his entire bankroll and win every time. However,
if instead this insider information is received through a noisy
channel, with some probability of error, the gambler should bet only a
fraction of his bankroll or face certain ruin. The Kelly criterion
gives the fraction to bet in order to maximise growth of the bankroll.
In this talk I will sketch the derivation of the Kelly criteria, tell
you how it will make you rich (Thorpe, 1966), why it will plunge you
into depression (Leib, 2000), and why it is of no use for an
occasional bet on the horses. I will then apply it (inappropriately)
to tell you how to spend your money on the Melbourne Cup.
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