129: Optimal bet sizing—lessons from a biased coin flip experiment w/ Victor Haghani

Aaron Fifield Podcast 2 Comments

Victor Haghani began his career at Salomon Brothers in 1984, starting out in a research role before joining their prop trading desk. In 1992, Victor left Salomon to become one of the founding partners of Long Term Capital Management…

LTCM was an incredibly successful hedge fund, up until 1998, when it failed in a spectacular fashion. Causing the Federal Reserve to step in and organize a bailout, in order to prevent the possibility of a collapse in the global financial system.

Victor took a ten year sabbatical after the dust settled, and in 2010 he founded an active index investing fund, Elm Partners.

For this episode, much of our discussion is in reference to an experiment Victor carried out (with some involvement from Edward Thorp), on the patterns of how 61 participants would bet on a biased coin.

Victor Haghani: Trader at Salomon Brothers, founding partner of LTCM, founder of Elm Funds.

Topics of discussion:

  • The varying outcomes of an experiment which involved 61 people, who came from various financial backgrounds, betting on a biased coin with real money.
  • Why many participants of the experiment chose to bet on tails even though odds were 60% in favor of heads, and why a third of participants went broke.
  • How to calculate the optimal bet size for this experiment, how Kelly Criterion would affect the overall outcome, and how to determine the expected value.

Links and resources mentioned:

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