Kelly Criterion & sports betting – How to use the Kelly Formula

One of the most important questions concerning every bet, is how much money should you place on the outcome of a match. Among other equally important questions like who to bet on, which online bookie to choose, why bet on a particular match; wondering how much money you should place on a wager, seems like the most crucial one.

Most punters usually answer this question by glancing at their wallet or their online bookmaker account. If they have a sizeable bankroll, they most probably will bet at maximum stakes. If they are on a bad mood, regardless of their recent bets, they will stake less. That is one of the most common mistakes a punter can make. This instantaneous decision doesn’t take into consideration the value of the bet or the (theoretical) chances of winning.

The solution: Kelly Criterion

Kelly Criterion looks like a safe way for punters to calculate how much you should stake. In this staking method, developed by John Kelly, the stake is proportional to the perceived edge. By using Kelly Criterion betting system a punter knows exactly how much money he should place on each bet to steadily get long-term profits. To simplify things, the Kelly Criterion calculates how much money you should place on a value bet (odds higher than expected), in order to grow your bankroll exponentially.

The Kelly Criterion is becoming popular among punters as a way to decide the exact amount of each bet according to the betting value. There are two available formulas, a simplified and a more extended one. Most punters are familiar with the simplified one, as they prefer avoiding confusion with a long series of numbers and variables.

Why was it named "Kelly"?

John Kelly, the man behind the formula, was not actually a gambler, but an employee at the AT&T's Bell Laboratory, back in 1950. The formula was first published in 1956 and was quickly discovered by the gambling community. Punters with mathematical knowledge realized that by using this formula, they could maximize their profits in a rather short period of time. At first they used it in horse racing, but it soon got transferred to sports betting and investing as well.

The winning formula

The simplified version of the Kelly Criterion formula is the following:

(BP - Q) / B

Where:

B = the Decimal odds -1
P = the probability of success
Q = the probability of failure (i.e. 1-p)

To better understand the Kelly Criterion we have to analyze two basic components: The win probability and the win/loss ratio. The first is the probability that any given trade you make, will return a positive amount. The win/loss ratio is simply the total positive trade amounts divided by the total negative trade amounts.

From theory to practice

You might be thinking, how can you use the Kelly Criterion on online betting? Here are 5 simple steps:

1. Check your recent betting results to assess your last trades (not less than 50). It is necessary however, to have followed a consistent betting pattern.
2. Calculate "P", the winning probability. To do this, divide the number of trades that returned a positive amount by your total number of trades (positive and negative). The closer this number is to "1", the better. Any number above 0.50 pretty much means that you are on a good track.
3. Calculate "B," the win/loss ratio. Do this by dividing the average gain of the positive trades by the average loss of the negative trades. If your average earnings are greater than your average losses the number should be over 1. A result less than 1 is still acceptable, as long as the number of losing trades is small.
4. Input these numbers into Kelly's fomula.
5. Record the Kelly percentage from the formula.

Evaluating results

The percentage (a number less than 1,0) that derives from this equation, represents how much your stake should be. For example, if the Kelly percentage is 0,05, then you should make a bet amounting to 5% of your total bankroll. This system lets you know how much you should diversify.

However, Kelly Criterion should be used with common sense. For example, you should never place 20% of your bankroll in one pick, regardless of Kelly suggestion. Remember that Kelly criterion is an algorithm, not a prophecy.

Is it worth it?

Kelly Criterion is based on a pure mathematical formula. However, knowing that this formula was developed for a telecommunication company, punters may wonder if this actually works as a one of the various football betting systems as well. The key to success is entering the two previously mentioned variables (win/loss ration, win probability) correctly and keep on doing this for a long period of time.

Is your money guaranteed?

The rule is strict: No money management system could lead in a fortune by its own. The Kelly Criterion will help you manage your portfolio, but there are many aspects that could not be solved. For example, it can neither suggest, nor pick winning bets for you. Make sure to continue analyzing your Kelly bets consistently and have a decent winning percentage you start using it.

Also, keep in mind that in sports betting, luck is always a crucial factor, which can put an effect in your returns. The same system could be used by various punters and the results could not be the same.

Kelly Criterion can not guarantee that you will always be in the winning side. It can just help you limit your losses and maximize your profits. This system is one of many mathematical models developed for that purpose.

The “Less than Kelly” option

This option is suggested to apprentice punters, or those experimenting with it for a while. The Kelly fraction assumes an infinitely long sequence of wagers. According to vast research of chances grown by the Kelly criterion, a punter using it a 1/3 chance of halving his bankroll before actually doubling it. A punter using the “half Kelly” option has a 1/9 chance of halving his bankroll before doubling it.

It is true that gamblers often overestimate their predictions. However, punters tend to misjudge the odds as well. If you do that, you will lose consistently. If you really want to take betting seriously, you have to estimate the odds either using the Kelly criterion or not. If you manage to do that to an adequate level in the long term, then your wrong estimations will not affect your bankroll.

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