[space848]

Another piece of financial literacy that should really be taught in every high school is the Kelly Criterion. Even a basic understanding of the concept can improve many people's risk/reward over time.

And while it's often mentioned in the context of high-risk bets, it's equally applicable to low-risk savings / investments (how much of savings to keep in cash vs the general stock market, given X% estimated inflation).

Surprisingly, I've come across a large number of people in (seed) investment circles, active investors and entrepreneurs who didn't know about it.

https://en.wikipedia.org/wiki/Kelly_criterion

[danuker]

There is a book that taught me a great deal: Systematic Trading by Rob Carver.

In it, he notes that betting/investing at the Kelly criterion implies you are quite confident in your abilities to forecast.

For a margin of safety, invest less, say, half-Kelly. That way, you allow for unknown-unknowns.

[dan-robertson]

I don’t really buy this. The Kelly criterion is fundamentally assuming log utility of money which I think doesn’t really apply to most people (that is, I think utility is more linear or superlinear around where their earnings are. I don’t think it applies to a VC fund either.) It is also mathematically somewhat complicated and hard for ordinary people to apply to the real world (note that as a Hacker News reader, you are already likely much more literate and numerate than an average person). I think it is better to try to give people a more intuitive understanding of risk (that is, what is risky and what it means for something to be risky) and push them towards safer, more diversified investments.

[danuker]

> utility is more linear or superlinear around where their earnings are

I am not sure what you mean. An extra $1k per month means tons more when you earn $1k compared to when you earn $5k.

[dan-robertson]

Ok, I take back superlinear, but log utility says that an extra $500 when you earn $1k is like earning an extra $2500 when you earn $5k, but I claim it is more like earning say $1000 when you earn $5k (so not linear but not really log either—more like square root)