Kelly Criterion

Kelly applied mathematics from information theory to create the Kelly Criterion (KC). From KC, a gambler could make the best bet size to get the most money in the long run, if she knew her odds of winning and losing.

There are two main parts to the Kelly Criterion (KC): win probability and win/loss ratio. In math formula form, that would be:

But the KC has more applications than just gambling. It can apply to any decision where we know the values of the variables.