Çetinkaya, S. and M. Parlar
"Optimal Non-Myopic Gambling Strategy for the Generalized Kelly Criterion"
Naval Research Logistics, Vol. 44, pp: 639--654, 1997.

We consider the optimal wagers to be made by a gambler who starts with a given initial wealth. The gambler faces a sequence of two-outcome games, i.e., `win' vs. `lose', and wishes to maximize the expected value of his terminal utility. It has been shown by J. L. Kelly, R. Bellman and others that if the terminal utility is of the form log(x) where x is the terminal wealth, then the optimal policy is myopic, i.e., the optimal wager is always to bet a constant fraction of the wealth provided that the probability of winning exceeds the probability of losing. In this paper we provide a critique of the simple logarithmic assumption for the utility of terminal wealth and solve the problem with a more general utility function. We show that in the general case, the optimal policy is not myopic, and provide analytical expressions for the optimal wager decisions in terms of the problem parameters. We also provide conditions under which the optimal policy reduces to the simple myopic case.

Keywords: Stochastic dynamic programming, gambling, non-myopic optimal policy.