Picking the right stock is mathematically identical to compressing a digital file.
April 15, 2026
Original Paper
Investing Is Compression
arXiv · 2604.10758
The Takeaway
We think of investing as a game of predicting the future or 'beating the market.' This paper proves that 'optimal investing' is actually a problem of information theory. By using the 'Kelly criterion,' the act of managing a portfolio can be factored into the same math used for data compression and entropy. It turns out that a 'good' portfolio is just the most efficient 'summary' of the market’s information. This links the high-stakes world of Wall Street directly to the fundamental laws of how we store data on a hard drive.
From the abstract
In 1956 John Kelly wrote a paper at Bell Labs describing the relationship between gambling and Information Theory. What became known as the Kelly criterion is an objective or utility function and a closed form solution in simple cases. The economist Paul Samuelson argued that it was an arbitrary utility function, and he successfully kept it out of mainstream economics. But he was wrong. We now know, largely through the work of Tom Cover at Stanford, that Kelly's proposal is objectively optimal: