The Kelly Criterion is a risk management method first promulgated by John L. Kelly, Jr. in 1956. It is an algorithm used to compute the optimum bet size when the edge and odds of a wager are known. It seeks to maximize the geometric mean of outcomes, which essentially maximizes return over time while eliminating the risk of ruin.
John Larry Kelly, Jr. (1923-1965) was a mathematician and scientist who worked at Bell Laboratories. He graduated from the University of Texas at Austin with a PhD in Physics in 1953. In 1956 he published “A New Interpretation of Information Rate” in the Bell System Technical Journal. He was a colleague of Claude Shannon (1916-2001), another famous scientist, who previously published his theory of probability based data transmission in 1948. Shannon is hailed by many as the “father of the information age” because of his work on information theory as well as discovering binary digit computing.