How the Kelly Criterion Works

The Kelly Criterion, also known as the Kelly Strategy, Formula or Bet, was developed by J.L Kelly in 1956. He was working as a researcher at Bell Labs, and created the Criterion to help determine the best bet size to increase wealth.

The Kelly Criterion is used in various aspects of investment strategy, including asset allocation and financial management, and is also very helpful in deciding how to place your sports bets. To learn more about this resource and how to use it, read on.

Applying the Kelly Formula

To calculate the Kelly Criterion, you need to apply the following formula:

(bp – q)/b = f

Where b represents the wager’s given odds on the wager, p represents the probability of winning, and q represents the probability of losing (to determine q, calculate the value of 1 – p). The resulting number, f, is the bankroll portion that you should bet.

To illustrate how the Kelly Criterion is found, consider the following example:

If p is 0.8 (i.e., there is an 80% chance of the bet winning), then q is 0.2 (1 – 0.8) and there is a 20% chance that the bet will lose. Where the given odds are 1:1, so that b = 1, the formula is:

(1*0.8 – 0.2)/1 = 0.6

In other words, f is 0.6 and you should stake 60% of your betting budget on this prediction. By using a percentage of your bankroll, the formula allows you to only bet what you have available and makes it more difficult to wager what you can’t afford. Think of it as bankroll management, made easy.

You Decide on p’s Value

The Kelly Criterion is not purely mathematically objective; there are subjective elements to the formula too. First of all, the odds are decided and set by your bookmaker. Secondly, and more importantly here, you get choose the value of p.

How likely do you think it is that the bet will win? This is where your own judgement and research comes into play. You need to look at injury reports, past performances, stats, and whatever other information is available. Often, you’ll need to look at how individuals function and interact within the team, as this can affect the overall squad and make the difference between winning and losing.

Your insights are essential, and the more time you spend studying the sport and athletes, the more astute you will be. Once you know what p is, you can subtract that value from 1 to determine q. Then, enter p, q and b (after you check what the odds are) to find f and place your wager.

Keep a Cool Head

While the Kelly Strategy is helpful, it’s important to remember that it does not guarantee any wins but it gives a better chance of winning big on horse racing betting and wagering. Over time, you’re likely to experience losses, whether from misjudgement on your part or completely unpredictable events. When this happens, stay calm.

Keep wagering within your means, learn from your mistakes and ride out your bad luck. The smart bettor knows they’ll win again, and hones their skills as they wait. This is all about playing the long game.