Kelly criterion

A formula for the bet size that maximises the long-run growth rate of capital, given the probability of winning and the payoff.

With a 60% chance of doubling and a 40% chance of losing the stake, the formula suggests committing 40% of capital.

Nobody sensible bets full Kelly. The inputs are estimates, the formula is extremely sensitive to them, and overestimating the edge produces oversized bets whose drawdowns end careers. Practitioners use a fraction, often a half or a quarter, which sacrifices little growth and a great deal of volatility.

Its real value is directional. Bet more when the edge is larger, and never bet an amount that ruin would follow from.