“What would you do if you were invited to play a game where you were given $25 and allowed to place bets for 30 minutes on a coin that you were told was biased to come up heads 60 per cent of the time?”
So begins a research paper* by Richard Haghani, founder and chief executive of Elm Partners, and Richard Dewey, from bond fund manager Pimco. It shouldn’t surprise you that quite a few people were willing to play. Haghani and Dewey limited their experiment to 61 participants playing an online version of the game (with real monetary rewards).
It also shouldn’t surprise you to know that, while they knew that the odds were in their favour, most people didn’t know the optimal strategy for maximising their profit over the 30 minutes available. That’s because, outside the professional gambling fraternity, few people have heard of the Kelly Criteria.
This mathematical formula, published by John Kelly in 1955, optimises profit in games of chance where the odds are skewed towards the player. We won’t go into the details here (Matt wrote a Kelly Criteria blog post a few years back) but, given the game described by Haghani and Dewey, a profit maximising participant should bet 20 per cent of their available funds on each flip of the coin. Bet any more than that and the inevitable run of bad luck is going to be ruinous. Bet less and you are leaving too much profit behind. Continue reading “How To Lose When the Odds are With You” →