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Optimal nonmyopic gambling strategy for the generalized Kelly criterion

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  • S. Cetinkaya
  • M. Parlar

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. © 1997 John Wiley & Sons, Inc. Naval Research Logistics 44: 639–654, 1997

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  • S. Cetinkaya & M. Parlar, 1997. "Optimal nonmyopic gambling strategy for the generalized Kelly criterion," Naval Research Logistics (NRL), John Wiley & Sons, vol. 44(7), pages 639-654, October.
    • Handle: RePEc:wly:navres:v:44:y:1997:i:7:p:639-654
    DOI: 10.1002/(SICI)1520-6750(199710)44:73.0.CO;2-D
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    References listed on IDEAS

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    1. Leo Breiman, 1960. "Investment policies for expanding businesses optimal in a long‐run sense," Naval Research Logistics Quarterly, John Wiley & Sons, vol. 7(4), pages 647-651, December.
    2. Marshall Freimer & Myron J. Gordon, 1968. "Investment Behaviour with Utility a Concave Function of Wealth," International Economic Association Series, in: Karl Borch & Jan Mossin (ed.), Risk and Uncertainty, chapter 0, pages 94-119, Palgrave Macmillan.
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