Optimal nonmyopic gambling strategy for the generalized Kelly criterion

Optimal nonmyopic gambling strategy for the generalized Kelly criterion

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Article ID: iaor19981389
Country: United States
Volume: 44
Issue: 7
Start Page Number: 639
End Page Number: 654
Publication Date: Oct 1997
Journal: Naval Research Logistics
Authors: ,
Keywords: gaming
Abstract:

We consider the optimal wagers to be made by a gambler who starts with a given initial wealth. The gambler faces a sequence of two-outcome games, i.e. ‘win’ vs. ‘lose,’ and wishes to maximize the expected value of his terminal utility. It has been shown by Kelly, Bellman, and others that if the terminal utility is of the form log x, where x is the terminal wealth, then the optimal policy is myopic, i.e., the optimal wager is always to bet a constant fraction of the wealth provided that the probability of winning exceeds the probability of losing. In this paper we provide a critique of the simple logarithmic assumption for the utility of terminal wealth and solve the problem with a more general utility function. We show that in the general case, the optimal policy is not myopic, and we provide analytic expressions for optimal wager decisions in terms of the problem parameters. We also provide conditions under which the optimal policy reduces to the simple myopic case.

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