TL;DR
- The Kelly Criterion is a mathematical formula for determining the optimal stake amount and provides sports bettors with a way of maximizing the growth rate of their bankroll over time while minimizing losses.
- Instead of treating every dollar in your bankroll equally, the Kelly Criterion values growth in proportion to your current bankroll.
- The Kelly betting system is best suited for experienced sports bettors who are adept at handicapping events, have adopted responsible bankroll management practices, and are comfortable managing risk.
The Kelly Criterion is considered one of the most effective money management strategies for many types of gamblers, including sports bettors. It offers an excellent way to avoid the common trap of betting too much and blowing your bankroll.
What is the Kelly Criterion?
The Kelly Criterion is a mathematical formula that can be used to determine optimal bet size, helping sports bettors maximize their bankroll over a period of time while minimizing risks to avoid going broke.
In addition to its application in sports betting, the Kelly Criterion can also be used for casino games like poker and blackjack, where experienced players can estimate their probability of winning with a certain degree of confidence.
While the Kelly Criterion is widely known for its application in sports betting and gambling, it has its roots in networking technology. The Kelly Criterion was first introduced in a scientific paper entitled “A New Interpretation of Information Rate”. Authored in 1956 by Bell Labs researcher John L. Kelly Jr., the formula was originally intended to address issues related to signal-to-noise optimization in data transmission, to determine how much data could be transmitted over a noisy channel.
Its origins may sound heady, yet the value of applying the Kelly Criterion to gambling and investment was subsequently made by Claude Shannon, a pioneer in information technology theory. Prominent mathematicians like Edward Thorp, author of the strategy books Beat the Dealer and Beat the Market, also recognized the value of using the Kelly Criterion to determine bets in blackjack and manage stock market trades.
Kelly Criterion explained: How the formula works
The Kelly Criterion aims to maximize the logarithmic utility of wealth. So instead of treating every dollar in your bankroll equally, it values growth in proportion to your current bankroll. In other words, the more money you have in your bankroll, the less each additional dollar is worth to you, both emotionally and in practical terms.
The basic formula of the Kelly Criterion is as follows:
f* = (bp – q) / b
Where:
f* = fraction of bankroll to wager
b = net odds received (e.g., +100 odds means b = 1)
p = probability of winning
q = probability of losing (1 – p)
So, let’s say you are placing an NFL moneyline bet on the Dallas Cowboys with +100 odds, and based on your research, you estimate the bet has a 55% chance of winning.
In this case:
b = 1
p = 0.55
q = 0.45
Therefore, the formula to use for this bet is as follows:
f* = (1 × 0.55 – 0.45) / 1 = 0.10
According to the formula, your stake on this bet should equal a fraction of 0.10, which is 10% of your bankroll.
When to use the Kelly Criterion
It is best to use the Kelly Criterion when you have done your homework, have determined you have a clear edge, and the probability of winning is higher than the odds offered by the top online sportsbooks. The formula is especially valuable for sports bettors who have adopted a responsible sports betting strategy that includes effective bankroll management, with the objective of compounding returns over the long term while resisting the temptation to pursue short-term winnings.
In addition, by using the Kelly Criterion, you minimize the risk of blowing your bankroll by determining stake size based on both the odds and your confidence level. Heads up though, it is important to keep in mind that using the Kelly Criterion for sports betting is not for the faint of heart. You must have the stomach to handle the volatility that comes with using the formula, which can result in large swings in the balance of your bankroll.
When not to use the Kelly strategy
Kelly Criterion betting is not for everyone and is likely best avoided by new sports bettors or bettors who have limited ability to handicap a sports event. Indeed, if you are uncomfortable with handling risky bets, are chasing big winnings in the short term, have a limited bankroll, or are just making guesses about the probability of winning a bet, the Kelly betting system is not for you.
Conclusion
The Kelly Criterion formula is a powerful tool that experienced sports bettors can use to determine the optimal stake of a bet with the objective of growing their bankroll at the fastest rate possible without going broke. It is very useful for sports bettors with handicapping skills, who can determine the probability of winning a bet, and who have adopted responsible gambling practices with the objective of making profits over the long term.
Of course, like any sports betting strategy, using the Kelly rule comes with inherent risks and should be avoided by sports bettors who rely on guesswork and have a limited bankroll.
FAQs
The Kelly formula can be used to determine optimal bet size, providing sports bettors with a way of maximizing the growth rate of their bankroll while minimizing the risk of massive losses. The Kelly Criterion offers an excellent way to avoid the common trap of betting too much and blowing your bankroll.
The Kelly Criterion aims to maximize the logarithmic utility of wealth. So instead of treating every dollar in your bankroll equally, it values growth in proportion to your current bankroll.
It is best to use the Kelly Criterion in betting when you have done your homework and have determined you have a clear edge, meaning the probability of winning is higher than the odds offered by the sportsbook. The formula is especially valuable for sports bettors who have the objective of compounding returns over the long term while resisting the temptation to pursue short-term winnings.
