Also strongly recommend! Amazing ramble through the weird intersection of information theory, financial markets, degenerate gamblers, and gangsters. Kelly, when he wrote his paper at Bell Labs, was three degrees or less of separation from Claude Shannon, who invented the 'bit', information theory, and what everything digital comes from; Ed Thorp, who wrote 'Beat The Dealer' and started one of the earliest and most successful successful hedge funds (until his firm was busted by Rudy Giuliani); and mobster Manny Kimmel, who won a garage on Kinney Street in Newark on a bet, which eventually grew into Time Warner. Shannon built a wearable computer in the early 60s to try to predict roulette, and they would go to Nevada casinos to test out the theory and practice.

The book's web site is here - http://home.williampoundstone.net/Kelly/Kelly.html

A simple explanation of the Kelly criterion is that if you have an edge (ie bet $5 and win $6 on a fair coin toss) you should bet edge / odds. The edge in this example is 0.1 (50% * -1 + 50% * 1.2), the odds are even money 1:1. The Kelly bet would be 10% (the edge) / 1 (the even money odds) = 10% of your bankroll. (corrected)

If you bet 0 each time, the expected growth rate is 0, if you bet 100% each time, the expected growth rate is 0, because eventually you will lose your whole bankroll.

10% is big enough to matter, but not so big that a losing streak will eventually decimate your bankroll.

If memory serves, when you bet the Kelly amount, you have a 1-p probability of eventually experiencing a p drawdown, ie if you have $10, you have a 10% chance of ever getting as low as $1 before resuming the expected long-run growth rate. (which would be the edge (10%) * the bet (10%) = 1% of your bankroll per betting round)

Been a while since I tried to understand this, if I screwed it up hopefully someone will correct me.

Fortune's Formula is an amazing book. In line with this is also Jeff Ma's "The House Advantage", it's a solid read - http://www.amazon.com/House-Advantage-Playing-Odds-Business/...