Beyond the Kelly Criterion

This research conducts an in-depth examination of various risk management methodologies in financial trading, evolving from the high-risk, reward-driven YOLO Criterion to the advanced and nuanced Justus Criterion. It delves into how each methodology navigates the delicate equilibrium between growth opportunities and the inherent risks of significant losses, factoring in the dynamics of win probabilities and risk-reward scenarios. Introducing a layered analytical framework, this paper delineates the progression from the probabilistic foundations laid by the Kelly Criterion through to the adaptable constructs of the Tax and Just Criteria, culminating in the development of the bespoke Ad’Just Criterion. The pinnacle of this evolutionary journey is the Justus Criterion, which adeptly integrates these methodologies with insights into human behavioral patterns, particularly in terms of dealing with uncertainties in win probabilities, the aversion to losses, and the valuation of growth. Our findings indicate that the Justus Criterion presents a pragmatic, user-friendly strategy for trading that resonates with empirical data and the intrinsic risk preferences of traders, offering a comprehensive model for enhanced decision-making in financial markets.