Interesting result from Kelly's Criterion

Reply #9

jwhou — Wed, 25 Aug 2010 21:04:14 GMT

Well, the Mega Millions draw is getting close, the cash value is 94.2 million but the odds are 1:175 million. If you plug in the numbers, you get f=-492 but the contribution from the jackpot prize is only f=-1.9 hence the subsidiary prizes are way too small given the relative odds. I suspect that you would need a huge jackpot, much larger than would be necessary for a positive ROI before the Kelly's Criterion will tell you to buy instead of hedge because you would still have to offset the effect... [ More ]

Reply #8

eddessaknight — Wed, 25 Aug 2010 20:23:59 GMT

Good posting jwhou, Kelly Criteria alive well @ Vegas Racing Books....

Bye the Bye, for all who are interested, ROI = RETURN ON INVESTMENT and yes player neeeds a positive ROI to overcome the odds long term. Overall very hard to beat negative math expectation with just more conventional math

Happy Hunting.

EddessaKnight

Reply #7

truecritic — Wed, 25 Aug 2010 20:08:59 GMT

When the jackpot exceeds the odds, what does Kelly say? I never plugged it into that situation.

Kelly was (is?) popular with horseracing. A situation where you can be ahead of the game and can also decide if there are overlays. When an overlay occurs Kelly gives the optimum bet, however, most of the crowd thinks it is too aggressive. Too easy to be off on what you consider to be an overlay. Fractional Kelly is preferred.

Reply #6

jwhou — Wed, 25 Aug 2010 20:03:53 GMT

Which is why the results are negative. You can still make money of negative results but you need to hedge some short sales or underwrite derivatives. Unfortunately, the government aint going let you do that without substantial capital and even then they're not going to let you do it with the lotto.

The thing is that there are rare occasions when a Jackpot lottery or a scratchoff lottery has a positive ROI due to the probability of rollover in Jackpot

Reply #5

truecritic — Wed, 25 Aug 2010 19:57:25 GMT

I am positive you know this but for the benefit of others that haven't got a clue, it only works when you have a positive ROI (rate of return). Lotteries all have a negative ROI for the player.

Reply #4

jwhou — Wed, 25 Aug 2010 19:54:54 GMT

At how I'm a little surprised at how large a value the equation came up with and it's all from the subsidiary prizes which means no matter how high the jackpot gets, even if it's enough to get the expected return above parity which seems to be the decision point for most people to jump in big time on the lottery, the subsidiary prize structure is so heavily biased against the player that you still can't win in the long run because you can never have enough capital to wait for the big hit. I was... [ More ]

Reply #3

jwhou — Wed, 25 Aug 2010 19:33:30 GMT

The Kelly Criterion was based on Claude Shannon's work in Informatics. Claude Shannon is the guy that gave us digital electronics, and telecommunications and even genetics. His last unpublished paper before dying of Alzheimers in 1978 was to be the ultimate solution to the Rubik's cube, something which we've only just been able to sort out but only with Google's server farm as a giant supercomputer. He also spent many years trying to determine how small can a Unicycle be and still be ridden and... [ More ]

Reply #2

jimmy4164 — Wed, 25 Aug 2010 17:12:02 GMT

http://en.wikipedia.org/wiki/Kelly_criterion

Reply #1

ressuccess — Wed, 25 Aug 2010 16:49:09 GMT

jwhou, I didn't know about Kelly's Criterion. What's about

Interesting result from Kelly's Criterion

jwhou — Wed, 25 Aug 2010 05:26:18 GMT

Kelly's Criterion is where informatics is used in gambling or investing and is for sizing your bet as a fraction of your available capital. It's actually a logarithmic proof and I'm not sure I'm doing it right, but it works out as:

f = (bp - q)/b

where f = fraction of capital

b = expectations or gamblers odds

p = probability of win

q = probability of loss

Just for a lark, I plugged in the values for tomorrow's 649 jackpot of 3.5 million with simplifications such as igno... [ More ]