Babak Bagheri

How fast can you earn money? Are there bounds, and if so what are they? We all hear the statistics about Gross Domestic Products: the rates of GDP growth which vary from -10% to 10% or so; although the extremes are rare. Rates of growth for smaller groups or individuals can fluctuate much more wildly. But what is the upside limit, if any, and how does one approach it?

Here is a recent claim form one of the few successful “dot-coms:” from $0 to $170 million in three years. (The claim is fairly legitimate. It’s the story of “mint.com” being sold to Intuit after three years of operation.) Can we use data like this to come up with the earnings speed limits we’re looking for? I think the answers would be interesting if anyone did a study like this. The highest rates of accumulation would probably go to lottery winners, then traders of various kinds (commodities, stocks, etc.), then entrepreneurs and VCs with earnings capitalization, then the rest. In other words, the highest rates of accumulation would go with the lowest probability events.

John L. Kelly

What does all this mean to enterprising folks? It means the careful market experiments we conduct have to take into account the “hail mary” or “home run” factor. We should have at least one “bit bet” type experiment going at any given time, but we should try many more smaller bets with higher probability. This kind of calculation is familiar to gamblers and some traders. William Poundstone gives an entertaining account of a particular approach to this betting problem in his book “Fortune’s Formula.” It’s the story of what I call proportional betting invented by John L. Kelly. The basic idea is to modulate the amount you bet by the odds the market offers and how likely we think success is. Seems obvious, but most people forget ignore both the problem and Kelly’s and others’ ideas in the heat of battle.