Investors often start new positions too small due to myopic loss aversion. A powerful nudge is to set a default entry size for all new ideas. While deviations are allowed, requiring a manager to explicitly document their reasoning for going smaller introduces "process sludge" that forces more rational thinking.

Citing the Kelly Criterion, the most common and fatal trading mistake is oversized positions. Even with a consistent 60/40 winning edge, betting 2-10x more than is mathematically optimal guarantees you will eventually go broke. It is a statistical certainty.

Most traders, from retail to funds, make the same mistake: their position size is far too large. According to the Kelly Criterion, a mathematical formula for optimal bet sizing, overbetting will lead to a 100% chance of going to zero over time, even with a consistent winning edge (e.g., a 60/40 advantage).

Instead of using an arbitrary percentage, Gorham Thomason of AKO Capital determines maximum position size based on a stock's liquidity. This ensures the fund can exit a large position without crashing the share price if the investment thesis sours, providing a practical risk management framework.

Gurevich opposes the mechanical application of stop-losses to every position. Risk management should be at the portfolio level. Some positions become more valuable as they move against you and should be held longer. A trader must preserve the freedom to exit a trade based on a changed thesis, not an arbitrary price level.

By seeding new positions at ~0.5% and rarely exceeding 1% at cost, the fund mitigates the behavioral risk of averaging down too aggressively into a failing investment. This disciplined approach prevents a small mistake from becoming a large portfolio loss.

A powerful risk management technique is setting a maximum percentage of your portfolio that can be invested in a single stock *at cost*. A 5% at-cost limit means once you've invested 5% of your capital, you cannot add more, even if the stock price plummets and its market value shrinks. This prevents chasing losers.

A study found that people given tomorrow's headlines still performed poorly in simulated trading. Their failure wasn't in predicting market direction, but in sizing bets appropriately. Professionals outperform not by having a better crystal ball, but by skillfully modulating investment size based on their level of confidence, even choosing not to bet at all on some days.

A fixed loss limit is technically irrational if a statistical edge still exists. However, it's a useful, smaller irrationality that protects you from the far more dangerous irrationality of emotional decision-making ("tilt") that occurs under the stress of losing.