Kelly criterion

What it is

The Kelly criterion sizes a position from the estimated edge and the odds, to maximise long-run growth.

It answers a real question: not whether to bet, but how much.

Why it is fragile in practice

Kelly is optimal if the inputs are right. In markets they rarely are:

Input	Reality
The edge	Estimated, with error — and it changes
The odds	Not stationary
One bet at a time	Positions overlap and correlate

Overestimating the edge does not cost a little — it moves you past the point where growth turns negative. Betting full Kelly on a guessed edge is how accounts get destroyed.

How to check

Ask what edge was assumed, and how the size behaves if the edge is smaller than assumed. Most practitioners use a fraction of Kelly — not because Kelly is wrong, but because the inputs are.

See position sizing.