Kelly Criterion: How To Use It To Win Your Bets

Gambling is fun; we all know that. A big win is enough to get anyone’s heart racing. But for those who are serious about making a profit, the most important thing is to take the thrill out of the equation.

Experienced bettors who have made substantial profits from sports betting and gambling know that it all comes down to basic mathematics. Balancing the amount you bet can often make all the difference. And that’s where the Kelly Criterion comes into play.

It’s a clever, mathematical system for determining bet sizes to help increase your chances of long-term betting success. So how does it work? We’ll explain it all in this article.

Table of content

Key Takeaways Of The Kelly Criterion

The Kelly Criterion is a mathematical formula designed to optimise bet sizes and increase the chances of long-term success.
The Kelly formula considers the odds of winning and losing and calculates the ideal fraction of the bankroll to bet.
The method balances risk and reward, recommending higher bets when the odds are favourable and lower bets when they are not.
Correctly using the Kelly Criterion depends on accurately estimating the odds of success, which can be tricky.
Many bettors prefer the fractional Kelly approach to reduce the volatility and risk of large bets.
The Kelly Criterion is not a foolproof solution and does not guarantee profits, but it is a useful tool when combined with good bankroll management and analysis.
Knowing your risk tolerance and carefully analysing the odds before applying the Kelly Criterion to betting is essential.

What is The Kelly Criterion Formula?

Before we dive in, here’s a bit of context: John Kelly Jr., working at Bell Lab, wanted to reduce the problem of noise in long-distance telephone call signals for AT&T. He developed a method to combat it and published it as ‘A New Interpretation of Informational Rate’ in 1956.

When gamblers heard about it, they quickly realised that it could be used to optimise the bankroll for long-term betting. Thus, the Kelly Criterion was born.

Here’s how the formula goes:

f = (bp – q) / b

Although it sounds complicated, the formula is quite simple. This system helps you find the perfect balance between risk and reward. In this equation:

f = fraction of your bankroll to bet
b = decimal odds (e.g., 2.00 for even money)
p = probability of winning
q = probability of losing (1 – p)

It is a versatile formula that considers all relevant factors to give you the optimal amount of bankroll you should bet. The system encourages higher risks when you are ahead and reduces them when the odds are against you. Think of it as a risk management system for your betting.

Understanding The Mathematical Principles Behind The Kelly Criterion

Now that you know the basics, let’s dig deeper. The initial stage is understanding the idea behind the mathematics if you want a strong advantage over your opponents the next time you bet.

To achieve this, knowing how to calculate your odds and potential winnings using a proper mathematical formula is crucial.

the-kelly-criterion-formula

Two important concepts you need to understand are variance and expected value. Expected value is your average potential profit or loss over a certain period. Variance measures the possible fluctuation in your results from the highest to the lowest.

Using the logarithmic utility function, the Kelly formula guides gamblers and investors to the sweet spot between the highest return and the lowest risk, helping them maximise their profits. Put another way, if you win more, bet more; if you lose more, back off.

A Real-World Kelly Criterion Example

By now, the Kelly strategy should sound somewhat familiar. Here’s a real-world illustration to help clear up any remaining doubts.

Suppose you are betting on a match between Manchester United and Leicester City. After extensive research, you believe Manchester United has a 60% chance of winning. The odds offered by betting site are 2.10 for the Red Devils.

Let’s apply the Kelly Criterion to this situation:

First, identify the variables:

p (probability of winning) = 0.60
q (probability of losing) = 1 – 0,60 = 0,40
b (decimal odds – 1) = 2,1 – 1 = 1,1

Now, add this data to the Kelly Criterion formula:

f = (bp – q) / b
f = ((1,1 * 0,60) – 0,40) / 1,1
f = (0,66 – 0,40) / 1,1
f = 0,26 / 1,1
f ≈ 0,236

Interpreting The Result

According to the Kelly Criterion method, you should bet around 23.6% of your bankroll. Therefore, to win with your €1000 bankroll, the best bet is €236 on Manchester United.

The 23.6% suggested today is very high, inevitably discouraging many gamblers. For this reason, many bettors use the split Kelly approach, betting a smaller portion to reduce risk.

The accuracy of this calculation depends largely on your ability to correctly estimate the probability of Manchester United winning. If your estimate of 60% is wrong, so is Kelly’s recommendation.

kelly-betting-formula

This bet size is optimal only if you repeat this scenario many times. In reality, each betting opportunity is unique.

The Kelly equation assumes that you are comfortable with the possibility of significant fluctuations in your bankroll. Some bettors may find the suggested bet sizes too volatile for risk tolerance.

Putting The Kelly Criterion Into Practice

There is no doubt about the Kelly Criterion; it is a great tool for any bettor. However, to apply it correctly, profound thought, attention, and proper calculator are also required. If you apply Kelly’s method, here are a few things to consider to ensure you do it effectively.

Get The Odds Right

The Kelly Criterion is only as good as the odds you use. The analysis is in your hands, so make sure you do your homework before you use it.

Know Your Risk Tolerance

Betting aggressively while winning is one of the core concepts of the Kelly betting formula. But if that makes you uncomfortable, consider using a fractional Kelly approach. You’ll only bet a small portion of what the formula suggests rather than the total amount.

Manage Your Bankroll Wisely

While betting less than the Kelly Criteria suggests is acceptable, betting more is never a good option and can push one into gambling addiction. It is a slope that can quickly lead to a bad gambling experience.

Conclusion: Find your edge

You can’t blame the Kelly Criterion for not working if you keep betting on the underdog. Find your edge in betting and use it in conjunction with the method to get the best results.

The Kelly Criterion is not a magic bullet, although it can be a game changer. Combine it with innovative bankroll management and a thorough understanding of your selected betting markets, and you’ll be well on your way to starting to bet more successfully.

FAQ About The Kelly Criterion

⭐️ What is the Kelly Criterion?

The Kelly Criterion is a formula for determining the optimal size of a series of bets to maximise long-term growth while minimizing risk. It calculates the proportion of bankroll to bet based on the probability of winning and the payout ratio.

⭐️ How to use Kelly Criterion in betting?

To use the Kelly Criterion in betting, multiply your bankroll by the probability of winning minus the probability of losing divided by the odds. This result gives the fraction of your bankroll to bet for maximum long-term growth.

⭐️ Is the Kelly Criterion suitable for beginners in betting?

The method can be helpful for novice bettors but requires a good understanding of odds and bankroll management.

⭐️ Does the Kelly Criterion guarantee betting profits?

No, the Kelly Criterion does not guarantee profits, but it does help to optimise bets when used correctly over the long term.

⭐️ What are the risks of using the Kelly Criterion?

The biggest risk is the bankroll’s volatility, as the Kelly Criterion may recommend large bets in situations with high expected value.

Dalius Mikalauskas

Sports Betting Expert

Dalius became interested in sports betting at the age of 16, although he could not place bets at that time (bets accepted from the age of 18). However, it was not forbidden to sell betting picks, which is what the author did actively on sports betting forums. Today, he has more than 18 years of experience in sports betting. In school, the auth ..
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