The growth of relative wealth and the Kelly criterion
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 dif...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
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Springer US
2018
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| Online Access: | http://hdl.handle.net/1721.1/114640 https://orcid.org/0000-0003-2944-7773 https://orcid.org/0000-0002-6908-4236 |
| _version_ | 1811091833546080256 |
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| author | Orr, H. Allen Lo, Andrew W Zhang, Ruixun |
| author2 | Massachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory |
| author_facet | Massachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory Orr, H. Allen Lo, Andrew W Zhang, Ruixun |
| author_sort | Orr, H. Allen |
| collection | MIT |
| description | 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 |
| first_indexed | 2024-09-23T15:08:46Z |
| format | Article |
| id | mit-1721.1/114640 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T15:08:46Z |
| publishDate | 2018 |
| publisher | Springer US |
| record_format | dspace |
| spelling | mit-1721.1/1146402022-09-29T12:58:56Z The growth of relative wealth and the Kelly criterion Orr, H. Allen Lo, Andrew W Zhang, Ruixun Massachusetts Institute of Technology. Computer Science and Artificial Intelligence Laboratory Sloan School of Management Lo, Andrew W Zhang, Ruixun 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 2018-04-09T19:46:51Z 2018-07-01T05:00:06Z 2017-09 2018-03-23T05:43:12Z Article http://purl.org/eprint/type/JournalArticle 1387-6996 1573-6989 http://hdl.handle.net/1721.1/114640 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. https://orcid.org/0000-0003-2944-7773 https://orcid.org/0000-0002-6908-4236 en http://dx.doi.org/10.1007/s10818-017-9253-z Journal of Bioeconomics Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ Springer Science+Business Media, LLC application/pdf Springer US Springer US |
| spellingShingle | Orr, H. Allen Lo, Andrew W Zhang, Ruixun The growth of relative wealth and the Kelly criterion |
| title | The growth of relative wealth and the Kelly criterion |
| title_full | The growth of relative wealth and the Kelly criterion |
| title_fullStr | The growth of relative wealth and the Kelly criterion |
| title_full_unstemmed | The growth of relative wealth and the Kelly criterion |
| title_short | The growth of relative wealth and the Kelly criterion |
| title_sort | growth of relative wealth and the kelly criterion |
| url | http://hdl.handle.net/1721.1/114640 https://orcid.org/0000-0003-2944-7773 https://orcid.org/0000-0002-6908-4236 |
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