The Kelly criterion has several advantages and disadvantages. Some of the advantages are:
- It maximizes the expected geometric growth rate of the bankroll, which means it leads to higher wealth in the long run compared to other strategies.
- It accounts for the risk and reward of each bet or trade, and adjusts the bet size accordingly.
- It has a built-in mechanism to prevent ruin, as the bet size decreases as the bankroll decreases.
Some of the disadvantages are:
- It requires accurate estimates of the probability and payoff of each bet or trade, which may not be available or reliable in real-world situations.
- It can lead to high volatility and large drawdowns in the short term, which may not be suitable for risk-averse investors or gamblers.
- It can be difficult to apply in practice, as it may not account for transaction costs, taxes, borrowing constraints, or other factors that affect the actual returns.
The Kelly criterion is a useful tool for optimizing the bet size, but it should be used with caution and judgment. It may not be appropriate for every investor or gambler, and it may need to be modified or adjusted to fit the specific circumstances and preferences of each situation. .
