One of the most important strategies to manage your bankroll is the Kelly Criterion. It does not follow a fixed betting pattern or percentage. Instead, it instructs you to bet according to your estimation of value. The higher the value, the bigger the percentage of your bankroll you should bet.
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What is the Kelly Criterion?
The Kelly Criterion is a formula that helps you work out how much you should bet. It recommends that you should only bet if there is a difference between the true odds (your estimated odds) and the given odds (the bookie’s odds). Though it may seem complicated, the formula is actually very simple.
Kelly Criterion Formula for Sports Betting
The Kelly Criteria has several versions. Here is the simplest version for sports betting:
f* = [(b x p) – q] ÷(b)
f is the fraction of the bankroll to bet
b are the decimal odds – 1
p is your estimated probability of winning
q is the estimated probability of losing (1 – p)
Kelly Criterion Football Example
You can easily use the Kelly Criterion to decide how much to bet on a football match. Let us say that Manchester United is set to play against Real Madrid for the final of the Champions League. The odds makers have set Real Madrid as a slight favourite, at odds of 1.82. In this case, there is no draw possible (We will bet on match winner, not result after 90 minutes). These odds imply a 55% chance of winning. However, based on your own analysis, you believe Real Madrid has a 65% chance of winning.
You have seen value, so you can now use the Kelly Criterion to decide how much of your bankroll to bet.
The Kelly Criterion implies you should bet 22.31% of your bankroll on Real Madrid.
Kelly Criterion Horse Racing example
The Kelly Criterion also works for horse race betting. Let us say that your horse (Let us call him Lucky Punter) gets 4/1 odds (or 5.0 in decimals, or a 20% implied probability of winning) at the Cheltenham Hurdle. You believe, based on careful analysis, that Lucky Punter actually has a bigger chance of winning. You estimate the chances slightly higher, at 25%.
Using the Kelly Criterion, you can now work out how much of your bankroll to bet on Lucky Punter.
The Kelly Criterion implies you should bet 6.25% of your bankroll on Lucky Punter.
How to use the Kelly Criterion to decide how much of your bankroll to bet
As you can see, the Kelly Criterion does an effective job at telling you how much to bet. Sometimes, it can instruct you to bet an amount that is much more that what you would like to bet intuitively. In that case, you can opt to use the Half Kelly or the Fractional Kelly.
Half Kelly
The Half Kelly is a more conservative strategy. Simply work out the Full Kelly and divide by two.
Fractional Kelly
The Fractional Kelly lets you use any fraction of the full Kelly you want. Use a third, a fourth or a fifth, or whichever fraction best suits your betting strategy.
Combining with other staking strategies
You can easily combine the Fractional Kelly with any positive or negative staking strategy. That would mean you increase or decrease how much of a Full Kelly you bet, depending on your win/loss streak. Combine it with the Fibonacci Betting System, or Martingale System, for example.
When not to bet
When there is negative value, or the oddsmakers see the odds of an event more likely than you do, the Kelly Criterion suggests you should not bet. The formula will give you a negative number. Of course, that could mean that precisely the opposite outcome has more value, which is something you could consider betting on.
Advantages and disadvantages of using the Kelly Criterion
The Kelly Criterion has several advantages for the modern Punter, though it has its limitations.
Advantages
The Kelly Criterion has a proven track record, and is used by top investors and punters all over the world. Here are several advantages for punters.
Safeguard your bankroll
It helps you safeguard your bankroll, while taking just the right amount of risk. By increasing your wager and not simply betting the same amount every time, you have a dynamic betting strategy.
Keep your greed in check
The system is easy to use, and can protect you from your own bullishness. Instead of betting the bank on what you believe is a ‘sure win’ (sure wins do not exist in most sports), you are forced to rely on a smart formula that limits how much of your bankroll you risk.
Know when not to bet
The Kelly Criterion easily lets you know when not to bet. If it throws up a negative number, then it is time to reconsider your bet or even place the opposite bet.
Disadvantages
While the Kelly Criterion has many advantages, it has several drawbacks.
Based on your calculations
Whether or not the system works in the long term depends on your own skill at finding the right bets. If your estimations are better than the oddsmakers, it can be a great way to beat the bookies. If not, your wins will depend on luck.
A potentially aggressive strategy
The Kelly Criterion can potentially be a very aggressive strategy. It can easily instruct you to bet as much as 20% of your bankroll on a single bet. Most professional punters usually bet less than 5% of their bankroll per wager. Therefore, only bet a larger percentage is you are very sure you have identified value.
History of the Kelly Criterion
The Kelly Criterion was originally developed by economist John Kelly, who was working at AT&T's Bell Laboratory. It was developed to analyse long distance signal noise issues. The method was published in 1956 as “A New Interpretation of Information Rate”. Soon after it was published, it became popular among big investors. Warren Buffet, Charlie Munger, as well as legendary bond trader Bill Gross, all recommend the method. It helps them decide how much to invest in any given project.
The gambling community later realized its potential as an optimal betting system for horseracing as well as other sports. It is a general money management system for financial investments as well as sports betting.
Kelly Criterion Experiment
The Kelly Criterion has been proven to work in several experiments. This includes an experiment where players could bet on a coin that would land on head 60% of the time, for an even money bet. 28% of the players actually went bust, while only 21% of the players reached the maximum. By using the Kelly Criterion, and betting 20% of their total bankroll, players had a 94% chance of reaching the maximum.
Kelly Criterion in Betting FAQs
The Kelly Criterion has been shown to work in experiments with a 60% chance of winning even money. How well the criterion works for you depends on how proficient you are at finding value.
The Kelly Criterion lets you know how much of your bankroll to bet, depending on your estimation of calculation of value.
The Kelly Criterion will show you how much to bet. It will work out your optimal bet size, depending on the implied probability of the odds, versus your own assessment of the odds.
The Kelly bet is a bet that takes into account your own estimated probability versus the bookie’s odds and implied probability to help you decide how much to bet.
ThePuntersPage Final Say
Your success as a punter will depend on your choice of bets. However, as demonstrated by John Kelly, the size of your bets, relative to your bankroll, is very important.
Using Bankroll management strategies such as the Kelly Criterion will not guarantee spectacular returns. However, it will help you limit your losses, protect you from being too bullish and help you decide how much of your bankroll to wager on each bet. Read our article on Bankroll Management for more tips.
Big sports fan specialising in football. Experienced the lows of Vlad Chiriches and Tim Sherwood as a Spurs fan along with the more recent ‘success’ under Pochettino. My following of the New England Patriots since 2012 somewhat makes up for the lack of silverware produced by Spurs in my lifetime.
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