Manage your own money well, you are the real betting master (Part 2)
Suppose there is a simple dominant game: you will get $1.5 if the home team win, and you will lose $1 if the home team lose. Your total bet amount are $100, and you can invest any amount for each bet. The question is, how much money should you use to bet? It is certainly not a clear strategy to bet $100 all at once, but betting only $1 each time will also miss a lot of profit.
The Kelly Criterion solves this problem: how much money should be used to risk each time when the win/loss ratio are fixed? What needs to be clear is that the primary purpose of Kelly Criterion is not to increase the growth rate of money, but to control extreme risks.
In solving practical application problems, the betting ratio targeted by the Kelly Criterion is not compared to the total assets, but the assets that investors can withstand losses.
Every time a 40% betting ratio is used, then 60% of the winning rate is the most suitable.
If the investor's original data analysis system is lower than this winning rate, this proves that your system needs to be optimized, otherwise you will have to bear the psychological pressure of continuous losses. And this kind of pressure will bring a very big disadvantage to your investment behavior later.
In short, the Kelly Criterion is very effective in the initial stage of money construction management, but in the later stage, as the number of matches increases, the average value will be averaged out. You will find that more and more small probability events occur, at this time, you must use your own experience, betting methods, and money management to continuously weaken the risk, in each game, minimize the risk and obtain relatively high returns.
Of course, Kelly Criterion is only something that can be roughly used, and it is impossible to operate all betting in this way. In the process of formula calculation, you must combine your own grasp of the game, your own marginal effect, and your own betting skills to truly play a key role.
There is no system of money management that can be 100% reliable, and whilst the Kelly Criterion outlines a clear result, it assumes that the investor is maintaining the same betting pattern over an extended period of time, which is somewhat unrealistic.
With everything in the investment market – it is important to do your own research and not rely purely on an equation to determine the size of your portfolio.