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Collection: Mohnish Pabrai - #87 'Kelly Formula'


Video Link: https://youtu.be/bQ9KLjeR3LA


In this episode, Mohnish Pabrai talks about Kelly Formula and why it was a mistake on his book "The Dhandho Investor."


In this episode, you’ll learn:

  • Kelly Formula.

  • Why Kelly Formula doesn't work in investing?

To check out all Collection: Mohnish Pabrai <click here>

 

[Transcript]

(Source: https://youtu.be/7F2IGzES7Uc)

AUDIENCE MEMBER 00:01

Do you still think about the Kelly Formula in term of evaluating probability? [Inaudible]


ARVIND NAVARATNAM 00:07

Kelly Formula.


MOHNISH PABRAI 00:09

I'm glad you brought up the Kelly Formula, the Kelly Formula was a mistake on my part. I should have never put it into my book. I should have never talked about it.


It works, if you are doing, you know, 5,000 coin tosses. You know, where you repeatedly making bets with no nods. I mean if you had heads was 51%, tails was 49% and someone allowed you to do 5,000 coin tosses. And you got to pick heads that would be great to use the Kelly Formula to [Inaudible] bet-size and all of that.


But in investing at least the way we practice investing, you're making one-off bets. It's not like 5,000 coin tosses so it doesn't apply.


And so in hindsight, I realised that if I were to ever do another version of my book or another edition where the odd are low, I would acknowledge that and take that out. So don't worry about the Kelly Formula unless you are in some kind of situation with the ability to make a lot of bets with odd in your favour frequently.

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