...Unless you engage in strategies designed by traders and rediscovered by every single surviving trader, very similar to what we call, something called the Kelly Criterion, which is to play with the house money. ...
And later restates:
What Taleb said is we should be more aggressive with the house money.
AFAICT, the Kelly Criterion has nothing to do with playing with house money. Instead, Kelly tells you how much of your wallet to wager given the payout and probability of winning. The source of the money you stake is irrelevant. Dice don't care whether your wager came from the house or your 401k.
For example, in a coin toss biased 60% to heads with a 2x payout for win, you should bet 20% of your wallet on heads and keep doing that no matter which way the flips go (2p - 1 = 2*0.6 - 1 = 0.2). If p ≤ 0.5, don't bet.
I believe the point he is making about "house money" and the Kelly Criterion is the size of the bet corresponds to how far ahead you are -- as you get farther ahead, your bets will get larger.
The problem with the comparison is that if you have one trader who started with $20, and another with $100, but they both currently have $50, they will both, by the Kelly criterion, be betting the same amount of money, even though once trader is trading with "house money" and the other is not. They're still trading without memory, which is the point that he was trying to refute, as I understand it.
Is he actually arguing that "house money" is different from "your money" or is he just reusing existing terminology? IIRC, the idea of "house money" was invented by earlier researchers who tried to explain why people would bet more after winning. Obviously "keeping score of your wealth" explains the effect just as well as "playing with house money".
...Unless you engage in strategies designed by traders and rediscovered by every single surviving trader, very similar to what we call, something called the Kelly Criterion, which is to play with the house money. ...
And later restates:
What Taleb said is we should be more aggressive with the house money.
AFAICT, the Kelly Criterion has nothing to do with playing with house money. Instead, Kelly tells you how much of your wallet to wager given the payout and probability of winning. The source of the money you stake is irrelevant. Dice don't care whether your wager came from the house or your 401k.
For example, in a coin toss biased 60% to heads with a 2x payout for win, you should bet 20% of your wallet on heads and keep doing that no matter which way the flips go (2p - 1 = 2*0.6 - 1 = 0.2). If p ≤ 0.5, don't bet.
https://en.wikipedia.org/wiki/Kelly_criterion
https://www.youtube.com/watch?v=d4yzXbdq2DA
Playing this strategy optimizes your return and ensures you can never go bust, thereby missing out on the guaranteed payout over enough bets.