Anytime you risk money—whether in gambling, trading, or investing—you face two challenges:
- Maximizing long-term growth of your wealth.
- Avoiding ruin by betting too much and losing everything.
Betting too small means your capital grows slowly. Betting too large exposes you to devastating losses. The Kelly Criterion, developed by John L. Kelly Jr. in 1956, provides a mathematical framework to find the sweet spot between these extremes.
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