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285 | Nate Silver on Prediction, Risk, and Rationality
Sean Carroll's Mindscape: Science, Society, Philosophy, Culture, Arts, and Ideas
Maximize Gains, Minimize Ruin: The Kelly Criterion's Dual Nature
The Kelly Criterion provides a strategic framework for determining the optimal percentage of a bankroll to wager, which aims to maximize expected returns while minimizing the risk of total loss. It quantifies the appropriate bet size based on the probability of winning compared to losing, encouraging a conservative betting strategy to avoid ruin. Critics argue that the Criterion is overly cautious, especially in contexts where bettors are willing to risk bankruptcy. In scenarios like the St. Petersburg Paradox, where one can repeatedly engage in high-risk, positive expected value bets with a slight edge, the contradiction arises: though the expected value is infinite with consistent betting, the practical likelihood of enduring all risks—as the number of bets increases—approaches zero. This highlights a dichotomy in gambling strategies: balancing maximum profit potential against the realistic risk of total financial loss.
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