Episode summary
The Game Was Rigged in Their Favor. 28% Went Bust Anyway. Kris Abdelmessih on How to Size Bets
Excess Returns
· · 50 min · Hosts: Matt Zeigler · Guests: Kris Abdelmessih
Summary
Kris Abdelmessih explains the Kelly Criterion as a way to size bets, not just decide whether an idea has edge. The core distinction is between a good expected value on one bet and the better question of how much capital that bet deserves when outcomes repeat over time. He uses a biased coin study to show why going all in can be rational for a one-shot wager but disastrous in a repeated game, and why a smaller fraction of bankroll can produce much better compounded growth.
He walks through the formula as P minus Q, adjusted by the payoff when you win, and shows how it applies to even-money bets, underdogs, favorites, and real-world decisions like self-insuring a house or skipping an extended warranty. Kris argues that full Kelly maximizes long-term growth, but it still comes with brutal drawdowns, so most people should think about fractional Kelly, especially because real-world probabilities are uncertain.
The episode’s larger point is that volatility drag and bad sizing can ruin a good idea. Kris says investors should treat bankroll broadly, think in terms of repeated decisions, and be humble about probability estimates so they do not overbet an edge they do not really know they have.
Key takeaways
- Kris Abdelmessih says the Kelly Criterion answers how much to bet to maximize compounded growth, not whether a wager has positive expected value.
- The biased-coin experiment showed that betting 50% of bankroll on a favorable game can still lose about 97% of capital over repeated flips.
- Kris argues that full Kelly can maximize growth while still allowing severe drawdowns, so fractional Kelly is often a practical compromise.
- He says self-insurance and extended warranties can be analyzed by comparing the premium saved to the downside risk and your own bankroll.
- Kris emphasizes that uncertainty about the true win probability is a strong reason to bet less than full Kelly.
Notable quotes
“the Kelly criterion uh which uh prescribes an amount to bet and we're going to talk about well where does what is the idea behind it”
“If you bet 50% of the bankroll, most of the time you lose 97% of your money”
“the formula is FP minus Q over B”
“You don't want to like shrink your capital base”
How the episode opens
You're watching Excess Returns. I'm Matt Ziggler joined today. We're reviving this. This isn't quite teach me like I'm five, but this is definitely teach me something because there was an amazing essay. We ran it on Panoptica. If you haven't seen it yet, after this, you'll size bets in your head. That's a promise I can get behind. Moon Tower Zone. Chris Adamsia. Welcome back to Excess Returns.
Thanks, Matt. It's good to be here. — I'm super excited about this. Number one, because I love the idea of the Kelly bet. I've built spreadsheets. I've had some fun with this. But then you wo it in and you lay it over all these areas. I thought this was just supposed to be when I'm what playing playing blackjack in 1955 at a casino
With a bunch of mob bosses and here you are telling me I can put it against my marketing budget and things. So this is super neat. What are you going to teach me today?
Yeah. So, I'm going to teach uh about we're going to talk about the Kelly criterion uh which uh prescribes an amount to bet and we're going to talk about well where does what is the idea behind it? Um and where can we use it in life and uh and then also what intuitions fall out of it because it's what's very interesting.
It's a very simple formula uh but it just has a lot of application not necessarily the formula itself but the intuition behind the formula is widely useful for um kind of dealing with uncertainty in life in general. So uh that's what I I hope to get across. I mean I think that uh people will be able to walk away from this with the formula in their head and actually being able to use it when when it matters.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- position sizing
- kelly criterion
- expected vs compounded returns
- fractional kelly and drawdowns
- uncertainty in win probabilities
Companies and tickers mentioned
- Moontower
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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