There’s an idea, it’s a formula but really it’s an idea, in gambling called the Kelly Criterion. Broadly, it suggests to act in proportion to edge. Bet big when you have a big advantage. Card counters, like those in the book Bringing Down the House followed this idea.
While Kelly is math, like being Bayesian, it works as a general idea too. Most people never follow the formulaic ‘full Kelly’, rather they bet half or ‘quarter Kelly’ because there’s no way to truly know an edge. So, how exactly does it work as just an idea?
“I’ve had a ton of friends who thought Solana is the future, bought in at a couple of dollars, waited eight months and nothing happened and sold everything. Then, all of a sudden, boom Solana took off. The rapid climb is where a majority of the value capture occurred. You have to build a pretty serious conviction around something and have it be small enough dollars. You can’t say: this didn’t work I’m going to move into the next thing. You have to be able to say: I still have conviction here, I’m going to leave this be.” – Kevin Rose, September 2021
Rose practically uses the Kelly language! Rather than edge and bet he says conviction and small-enough-dollars.
This cost to benefit ratio approach is a nice way to frame decisions. While Kelly started in gambling and moved afield, anything about risk and reward, travel budgets for instance, works.
Most systems have lowish cadences: closer to construction than technology, and the reward portion takes time to compound. When that’s the case, it may help to think about how much conviction we have and how long the cycle may take.
This podcast hit my feed September 19, the same day my wife asked me to buy some Doge Coin. ‘Why’ I asked. I’d convinced her to dollar-cost-average into Bitcoin and Ethereum, but it took a fair bit of convincing. ‘I just want some’ she explained. shrug