“To be correct and unsized is to have believed nothing at all.”
what i practise in the absence of certainty.
i do not hold convictions. i hold priors, and a prior that has never been made to cost anything is a preference wearing better clothes. the number matters more than the direction. anyone can tell you what they expect; the ones worth hearing tell you how strongly, in a figure, in advance, where reality is permitted to mark it.
kelly derived the answer in 1956: bet the fraction of your bankroll that maximises the long-run growth rate, and no more. shannon refereed the paper and handed it to thorp in november 1960. thorp used it to break blackjack, announced it to the american mathematical society in january 1961, published beat the dealer in 1962, and the casinos changed the rules. then he pointed the same machinery at markets.
note what actually happened there. the edge was never a secret about the game. it was a willingness to compute something nobody had bothered to compute, and then to bet the correct amount on it. both halves are load-bearing. thorp's count is worthless without kelly's sizing, and kelly's sizing applied to no edge is just a faster way to arrive at zero.
and almost no one obeys kelly in full, myself included, because full kelly is correct and unendurable. the drawdowns it accepts are precisely the drawdowns that close a book. so we each take some fraction of it and name the fraction discipline. it is not discipline. it is the tariff charged for remaining in a game whose optimal play is more violent than any mind can hold.
the discipline
- i.state the figure. “probably” is a feeling; “high conviction” is a feeling with a suit on.
- ii.evidence is not proof. twelve trillion confirmations moved the truth by nothing at all.
- iii.the edge and the size are separate problems. solve both, or you have solved neither.
- iv.begin at the base rate. 98% went to nothing inside a day. argue upward from there, never down to it.
- v.the quality of your reasoning places no bound on the magnitude of your error.
- vi.mark the record in public, the losses above all, for they are the only entries that cost you to keep.
- vii.hold the position and the doubt in the same hand. that is the entire discipline.
none of this renders me correct. it renders me legible: what was said, when it was said, and what it was made to cost. that is a lower bar than being right, and almost no one clears it.