Understanding and Utilizing the Kelly Criterion

The Kelly Criterion

Jay Pryce

Thursday, September 7, 2017 7:40 PM GMT

Thursday, Sep. 7, 2017 7:40 PM GMT

Whether you're new to sports betting or a 30-year veteran, adopting the Kelly Criterion as a money management tool is essential to staying in the game long-term. What is it? How does it work? Click here to find out.

Selecting winners is only part of the game in sports betting. Over 10,000 picks, 98 percent of us will hit 50-50 on our plays at fair odds, eventually losing money to the bookmakers’ vigorish. The key to growing one’s bankroll is money management. Knowing when, why, and how much to wager is the true difference between winning and losing as a sports investor. The Kelly criterion, which seeks to maximize the growth of one’s wealth over time-based on mathematical edge, is hands down the best method for long-term success.

What is the Kelly Criterion?

In sports betting, the Kelly criterion is used to calculate the ideal percentage of your funds to risk on a wager, based on your prior winning percentage and average return on those bets. The formula was invented by John Kelly, who in the 1950s developed a probability theory to help AT&T’s Bell Laboratory improve long distance telephone signal noise issues. Gamblers soon adopted its principles to their craft. In essence, when put to use in investment practices, it offers optimal betting stakes based on your edge in the market. The shorthand version of the method is just edge divided by odds. Based on its usage, the formula can get much more complex. For sports betting purposes, converting to decimal figures is easiest when calculating one’s edge and bet size. The basic formula is follows:

Kelly % = (OW-L) / W

Where ‘O’ is the decimal odds - 1, ‘W’ is the probability of success, and ‘L’ the probability of failure (i.e. 1-W).

Another way to look at is:

Kelly % = W – [(1-W) / R]

Where ‘W’ is your winning percentage, and ‘R’ is the ratio of average gain versus losses:

The primary advantage of the Kelly criterion it that it maximizes the limiting exponential growth rate of wealth by boosting the expected value in a certain period. Simple as that. Let’s put the Kelly criterion to work using a real world example.

 Putting the Kelly Criterion to Work

Say you tracked your last 100 NFL bets and your record is 55-45 at -110 average odds.

Plug in the numbers to the formula:

W = 0.55

L = 1-0.55 = 0.45

O = 1.91-1 = 0.91

(0.55*1 – 0.45) / 1.91 = .05

The positive expectation is an edge of .05 percent, which Kelly suggests you wager next to maximize the growth of your bankroll. Simple and effective.

Advantages and Disadvantages

Without getting into the nitty-gritty of mathematical theory, utility use, and the like, let us look at the basic pros and cons of the Kelly criterion as it applies to sports betting.

Pros:

  • Maximizes rate of long-term profit
  • Statistically proven to outperform similar wealth-growth formulas
  • Bettor never risks gamblers ruin if executed properly
  • Can be applied without consideration to prior investment opportunities, i.e. can start fresh from season to season, year to year, etc.

Cons:

  • Hurts bettors overvaluing their edge. Figuring probabilities and values is the toughest part of sports betting, and Kelly will burn those that overestimate.
  • Short-term stakes can be highly inflated; bettors often use half or quarter stakes to work around

Utilizing the Kelly Criterion offers optimal growth if done correctly. It can be a slow and arduous journey, but adopting it will make every sports investor better at their craft. It requires you to come as close as possible to figuring precise calculations of the likelihood of an event, which is the difference-maker from making money or burning it in sports betting. Check out SBR's Betting Tools page for a Kelly Calculator and other great scripts.

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