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MENTAL MODEL · M7825

Kelly Criterion

Kelly Criterion
TechnicalHigh supportProbability Theory
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Version 1.0.0 · Updated 2026-07-28

CORE DEFINITION

In finance, the Kelly criterion (or Kelly strategy or Kelly bet) is a formula for risk allocation with the sizing a sequence of bets by maximizing the long-term expected value of the logarithm of wealth, which is equivalent to maximizing the long-term expected geometric growth rate. John Larry Kelly Jr., a researcher at Bell Labs, described the criterion in 1956.

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In finance, the Kelly criterion (or Kelly strategy or Kelly bet) is a formula for risk allocation with the sizing a sequence of bets by maximizing the long-term expected value of the logarithm of wealth.

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In each bet with positive expected value, allocate a fraction of capital according to f* = (bp − q)/b to maximize the long-term logarithmic growth rate of wealth; f* is the optimal betting fraction for compound growth (b is net odds, p is win probability, q=1−p).

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Kelly_criterionZH · Explicit
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