Kelly Criterion Simulator Shows Why Full-Kelly Betting Can Wipe You Out
This simulator models bankroll growth under Kelly-based staking, revealing that even a positive edge can produce severe volatility and deep drawdowns. It compares full Kelly vs. fractional Kelly, showing how reducing exposure trades growth for stability. The key insight: probability estimation error, not the formula, is the real risk—overbetting from an overly optimistic edge can ruin a bankroll.
Even if the estimated edge is positive, full Kelly can create sharp drawdowns and highly unstable bankroll paths when the probability estimate is noisy or the market conditions are less stable than assumed.
- rahimnathwani
I made a 'game' to help me son get some intuition for bet sizing: https://tools.encona.com/investor
- SomaticPirate
Interesting, I recently learned about this.
So there is a term called "Full Kelly" which is were you actually wager the amount given by the formula. This is pretty aggressive and not for the faint of heart. Usually, you do something like a "half Kelly" where you halve the suggested bet amount. Usually because you assume you might be incorrect in your estimated advantage.
What I haven't found yet is some mental math rule to apply this. Given some assumed advantage, what percentage should I "wager"?
- dnnehgf
the first lesson here is that betting is easy when you believe that you know the important variable, your edge.
the second lesson is that, no matter how poorly you perform, you are going to be able to make the case to your stakeholders that,
contrary to all evidence, you do in fact have an edge and you are in fact exploiting it correctly.
the lesson not here is that, in practice, continuing to believe that you know your edge is going to be virtually impossible in the long run, partly because of volatility, but mostly because, in practice, you do not know it.
- forinti
Kelly is nice if you know the odds.
- profsummergig
In case the author is here:
What's the difference between "win probability of win" and "odds", please? The seem the same thing to me.
And also, what are "decimal" vs. "american" odds, please?
Thanks.