The Game Was Rigged in Their Favor. 28% Went Bust Anyway | Kris Abdelmessih on How to Size Bets

How much of your portfolio does a good investment idea deserve? Kris Abdelmessih of Moontower joins Matt Zeigler to explain why having an edge is only part of the decision: position size can determine whether favorable odds translate into long-term growth or damaging losses.Through a coin-flipping experiment and everyday examples, Kris makes the Kelly Criterion accessible without a complicated derivation. The conversation explores the difference between expected returns and compounded wealth, why growth-maximizing bets can still be uncomfortable, and how uncertain probabilities make a case for betting less. From portfolio decisions to insurance and extended warranties, the goal is to build better intuition about how much risk to take.Topics covered:How a favorable coin-flipping game exposed costly mistakes in bet sizingWhy maximizing the expected payoff of one bet differs from maximizing long-term compounded growthHow oversized bets can undermine an otherwise profitable opportunityThe Kelly Criterion's three inputs: probability of winning, probability of losing, and payoffWhy a constant percentage of your bankroll means changing the dollar amount after wins and lossesHow different payoffs change the appropriate size of a betApplying the framework to hypothetical self-insurance and extended-warranty decisionsWhy full Kelly can involve substantial drawdowns, and the tradeoffs of fractional KellyWorking backward from a position size to the odds needed to justify itAllowing for uncertainty in your estimates and preserving capital for future opportunitiesThe essay behind this conversation:After this post you will be sizing bets in your headhttps://www.panoptica.com/after-this-post-you-will-be-sizing-bets-in-your-head/Research discussed:Rational Decision-Making Under Uncertainty: Observed Betting Patterns on a Biased Coinhttps://arxiv.org/abs/1701.01427Kris Abdelmessih's Moontower newsletter:https://moontower.substack.com/Moontower:https://moontower.ai/Kris Abdelmessih on X:https://x.com/KrisAbdelmessihChapters:00:00 Position sizing and the favorable coin-flip experiment04:45 Why a good bet can produce bad outcomes13:49 The Kelly Criterion formula explained18:10 Adjusting your bankroll and accounting for the payoff23:03 Applying Kelly to a self-insurance decision30:25 Full Kelly, drawdowns, and reasons to bet less34:59 Working backward from bet size and evaluating warranties41:09 Volatility drag, uncertain odds, and the experiment's results46:09 How much capital does your edge deserve?Learn more about the Excess Returns podcast network:https://excessreturns.coNo information discussed in this podcast should be construed as investment advice. Securities discussed may be held by the hosts and guests, their firms or their clients.