What's the mathematics foundation of Money Management?

Discussions about Money Management and Risk Control.
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hylt
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What's the mathematics foundation of Money Management?

Post by hylt » Tue Dec 20, 2005 10:44 am

Which division of mathematics does Money Management belong to? Gambling Theory, Stochastic Integration, or any others?

Thanks.

Paul King
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Position-sizing and probability theory

Post by Paul King » Tue Dec 20, 2005 11:21 am

If you read Fortune's Formula by William Poundstone, you would say it is in the realm of 'Information Theory' (which is a great book by the way - on my recommended trading top list), but I believe for practical purposes it is more related to probability theory than anything else, since you are trying to determine the amount to risk that gives you the 'best' risk/reward ratio for your objectives in the context of a estimated distribution of possible trade outcomes.

Hope this helps

Paul

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