Calculated Boldness: Optimizing Financial Decisions with Illiquid Assets

Stanislav Shalunov, Alexei Kitaev, Yakov Shalunov and Arseniy Akopyan

Papers from arXiv.org

Abstract: We consider games of chance played by someone with external capital that cannot be applied to the game and determine how this affects risk-adjusted optimal betting. Specifically, we focus on Kelly optimization as a metric, optimizing the expected logarithm of total capital including both capital in play and the external capital. For games with multiple rounds, we determine the optimal strategy through dynamic programming and construct a close approximation through the WKB method. The strategy can be described in terms of short-term utility functions, with risk aversion depending on the ratio of the amount in the game to the external money. Thus, a rational player's behavior varies between conservative play that approaches Kelly strategy as they are able to invest a larger fraction of total wealth and extremely aggressive play that maximizes linear expectation when a larger portion of their capital is locked away. Because you always have expected future productivity to account for as external resources, this goes counter to the conventional wisdom that super-Kelly betting is a ruinous proposition.

Date: 2020-12
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://arxiv.org/pdf/2012.13830 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2012.13830

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().