Should they be risking that much of their bankroll in a single bet? It seems like as we've just seen, that leaves MoneyPot and its investors exposed to a whale getting lucky and wiping them out.
According to the Kelly criterion, yes they should be. You need to me risking that much to maximum the expected log of your bankroll. If you only risk 1% of your bankroll on the highest payout, you're risking much less than 1% of your bankroll on the other payouts, and those are the most common. The big payouts are rare enough that apparently it's worth risking more than 1% and relying on the fact that they don't come up very often.
if you are saying that "the chance is 1 in 32768 to end up in either or the outside positions" do you mean that for all color bet options?
in case of green it is 3X
in case of orange it is 23X
in case of red it is 121X
Those are the payouts. I'm talking about the chance of them coming up, not the payouts when they do. The payouts are much lower than the odds against them happening because you also get paid when they don't come up. If you could set the payouts to 32768 in the two outsides and 0 everywhere else, that would be a zero house edge game.
So if I understand this correctly... tl;dr That is how plinkopot works and this guy just got really lucky? or is their an error with kelly?
The guy hit a 1-in-32k shot on his 27th attempt betting 0.4 BTC on the red line. That's about a 1 in 1200 chance of happening. So he got kind of lucky.
It appears that the bet was less than a full Kelly, and that the proportion of the bankroll that Kelly tells us to risk is much higher than our intuition would suggest.