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Epictetus comments on Open Thread, Apr. 20 - Apr. 26, 2015 - Less Wrong Discussion
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If utility is logarithmic in wealth, the Kelly Criterion tells me the right size of stake to put on a given bet, given the odds offered, my subjective probability and my wealth. In practice, in the real world, what's the right number to plug into the "wealth" part of the equation? My current savings? My yearly salary? The value of my home minus the money owing on it?
The "wealth" part of the equation is the total amount you're willing to gamble with. If you have money set aside for frivolities like food, then that wouldn't be part of your wealth as far as the Kelly Criterion is concerned.
The general principle with gambling is never to bet more than you're willing to lose. Kelly betting is optimal in the sense that over the long run, no other system will outperform it. In the short run, it's quite volatile and you can get very low.