Bet Sizing Under Uncertain Edge
The Kelly formula takes and as known. In a casino with a counted deck that is nearly true. In trading it is never true, and the gap matters more than the formula does.
Error in the edge is worse than it looks
Suppose you believe your edge is 10% and stake accordingly, but the true edge is 5%. Full Kelly on the real numbers would have been half of what you staked, so you are at double Kelly, which the Kelly criterion showed is the stake where long-run growth is zero.
A 50% overestimate of the edge turns a good strategy into one that compounds nothing. Not one that underperforms: one that goes nowhere.
Now make the same size of error the other way. You believe the edge is 10% when it is really 15%, so you stake two thirds of the correct amount. You keep around 90% of the available growth.
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