Fortune's Formula or the Road to Ruin? The Generalized Kelly Criterion With Multiple Outcomes
Karl Whelan ()
MPRA Paper from University Library of Munich, Germany
Abstract:
You can bet on an event where there are multiple possible winners but only one will actually win. At the odds offered, you think there may be multiple bets worth taking. How much do you place on each bet to maximize your expected utility? We describe how this problem can be solved for concave utility functions and illustrate the properties of the solution. The optimal betting strategy is more aggressive than strategies derived from considering each outcome separately such as the Kelly criterion. The strategy also recommends sometimes placing bets with negative expected returns because they act as hedges against losses on other bets. While this strategy maximizes the bettor's subjective expected utility, if betting odds incorporate a profit margin and reflect underlying probabilities correctly, then this more aggressive approach loses more money and results in lower realized utility.
Keywords: Decision-making under uncertainty; optimal betting; Kelly criterion (search for similar items in EconPapers)
JEL-codes: D81 G11 (search for similar items in EconPapers)
Date: 2023-04-05
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/116927/1/MPRA_paper_116927.pdf original version (application/pdf)
Related works:
Working Paper: Fortune's Formula or the Road to Ruin? The Generalized Kelly Criterion With Multiple Outcomes (2023) 
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:pra:mprapa:116927
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().