A Dynamic Kelly Criterion for Games with a Maximum Payout

In 1956, J.L. Kelly provided the formula for the optimal portion f of one's capital to bet on a coin toss with favorable odds. We show that when the bet can be repeated a fixed number of times, but the game has a maximum payout M, the optimal portion f becomes a function of both k, the number of games remaining, and B, the current bankroll. We describe this function fk(B) and quantify the advantages gained over the fixed Kelly criterion. We also discuss the impact of changing the underlying utility function from a logarithmic utility to a more linear utility, and thereby optimizing a risk-reward ratio.