The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic Series)
"This is a fantastic reference covering the theory and practice of the field beautifully organized and produced. I have already used it and I will refer it to my students and colleagues." -- Professor David G Luenberger, Stanford University"This volume provides a fascinating historical account and critical assessment of the Kelly criterion (expected logarithmic utility maximization) as a universal criterion for the tradeoff between risk and return in portfolio management and gambling. Whereas economists have, by now, lost their innocence, recognizing that investors may have heterogeneous risk-return tradeoffs which may or may not be codifiable with von Neumann-Morgenstern preferences and even with rational decision-making, the quest for the Holy Grail of a universal criterion vividly documents early attempts to lay the scientific micro-foundations of economics." -- George M Constantinides, Leo Melamed Professor of Finance, The University of Chicago, USA"This book provides a comprehensive survey of research and applications on the Kelly growth optimal strategy that maximizes the expected utility of the log of final wealth ... There are numerous advantages to the Kelly strategy, especially for long-term investors who face a long sequence of similar decisions ... But a disadvantage is the possibility of severe downside consequences over a small or even moderate or large number of decisions ... Any investor with an eye to improving their long-term performance should be aware of the Kelly strategy and its cousins ... This book provides a fine coverage of these topics from original sources and recent research publications."--Quantitative Finance"The tragically short-lived genius John Kelly Jr. is best remembered for one of the most original and far-reaching ideas in modern finance. The Kelly criterion can be described as a gambling system that really works, in that it achieves the maximum long-term return from a favorable speculation. Kelly's idea has long had a cult following among people ranging from hedge fund managers to blackjack players.For those who have heard of the Kelly mythos and want to explore the science behind it, this book will be an instant classic. The editors have collected all the pivotal original papers, spanning centuries and the rarely bridged gulf between theory and practice. This book is indispensable for anyone interested in Kelly's legacy." -- William Poundstone, Author of Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street"In 1738 Daniel Bernoulli wrote a path-breaking paper. He gave a solution to the St. Petersburg Paradox by suggesting the use of a utility function. Arguing that marginal utility should be indirectly proportional to a person's wealth, he arrives at the logarithm. It can safely be stated that the idea of utility functions and marginal utility is the most precious gift which mathematics ever made to economics. This idea shaped the form of economic thinking in a decisive way over the past centuries. A central role is played, from the very early days on, by the logrithmic utility. In a dynamic setting this criterion, now named after the seminal work of J Kelly in 1956, leads in average to the optimal growth rate of a portfolio.The present handbook assembles in an impressive way the classical papers and also provides the link to modern research. It also presents important papers with a critical view towards the Kelly criterion. Among them figures the famous three-page paper of P. Samuelson from 1979 which is written by using exclusively one-syllable words."--Professor Walter Schachermayer , Faculty of Mathematics, University of Vienna