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.

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:

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

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.

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.

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.

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:

Now, add this data to the Kelly Criterion formula:

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.

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.

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.

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.

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.

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.

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.