The growth of relative wealth and the Kelly criterion
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10818_2017_9253_ReferencePDF.pdf
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Author(s)
Orr, H. Allen
Lo, Andrew W
Zhang, Ruixun
Date Issued
September 2017
Journal
Journal of Bioeconomics
Publisher
Springer US
Citation
Lo, Andrew W., et al. “The Growth of Relative Wealth and the Kelly Criterion.” Journal of Bioeconomics, vol. 20, no. 1, Apr. 2018, pp. 49–67.
Version
Author's final manuscript
Abstract
We propose an evolutionary framework for optimal portfolio growth theory in which investors subject to environmental pressures allocate their wealth between two assets. By considering both absolute wealth and relative wealth between investors, we show that different investor behaviors survive in different environments. When investors maximize their relative wealth, the Kelly criterion is optimal only under certain conditions, which are identified. The initial relative wealth plays a critical role in determining the deviation of optimal behavior from the Kelly criterion regardless of whether the investor is myopic across a single time period or maximizing wealth over an infinite horizon. We relate these results to population genetics, and discuss testable consequences of these findings using experimental evolution. Keywords: Kelly criterion, Portfolio optimization, Adaptive Markets Hypothesis, Evolutionary game theory
MIT Department
Massachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1007/s10818-017-9253-z
