The Kelly Criterion system was developed by scientific researcher J.L. Kelly in 1956 and has since become one of the world’s best-known betting strategies. It is a betting method to optimise one’s potential win on a particular bet or investment and can be applied in all ways of sports betting. It is also used in financial markets. Despite there being a level of complexity involved, as well as an amount of risk, it has become popular among people who bet on sports.
What is Kelly Criterion?
The Kelly Criterion is a relatively simple mathematical equation used to calculate the ideal stake to be placed on a particular bet by calculating the expected return from the bet and adding this to the player’s bankroll.
Although it all sounds pretty straightforward, there are complicated elements. One element of the Kelly Criterion is that the higher the expected probability of a win, the higher the stake that maximises the win. So to use the formula most effectively, you need to be able to calculate the chances of a particular bet going in the right direction.
How does it work?
In order to show how the Kelly Criterion works, we need to assume that you can calculate the probability of a particular bet going home with some degree of accuracy. With this information, we can then use the Kelly Criterion to calculate the stakes using the following simple formula:
(bp – q) / b = f
In this formula, ‘b’ refers to the multiplication factor of the available odds in the market with no bet. For example, if the decimal odds for a bet are 4.0, then ‘b’ is 3. The letters ‘p’ and ‘q’ refer to the probability of a bet winning and losing. So if a bet has a 55% chance of winning, then p will be 0.55 and q will be 0.44. Finally, ‘f’ is the answer to the formula and refers to the part of your total bankroll you need for this bet
If we take an example where a bet has decimal odds of 4.0 and the probability of winning is 35%, then we can use the numbers for the formula as follows:
((3*0,35)-0,65) / 2 = 0,4
Based on the Kelly Criterion, the probability of losing is higher than the probability of winning and you should therefore place 40% of your stake on the bet.
The importance of value
An important factor for the Kelly Criterion is that it can also tell when a bet has value. Value is an important concept in sports betting. In short, you have found value when the probability of the bet going home is higher than the odds offered on the bet indicate. For example, if the decimal odds are 4.0, then the given probability of the bet is 25% or 0.25. If you think the probability is actually higher than 25%, then you have found a bet with a positive expected value.
In the example above, the answer to the Kelly Criterion formula is a positive number. This tells you that you have found a bet with value. If the answer to the formula had been a negative number, this would tell you that the bet did not have a positive expected value. Put another way, this would show you that the probability of your bet going home is less than the given odds indicate. Since it is a fundamental rule that you should only bet when there is a positive expected value, a negative value in the Kelly Criterion would also be a way of telling you not to bet.
Benefits
The primary benefit of Kelly Criterion is that it helps a player find the right balance between risk, safety and between increasing his bankroll and protecting it. By increasing the size of the bet based on the expected value, you maximize your advantage. For those who are good at calculating the probability of an outcome going home, Kelly Criterion offers the most effective way to generate profit from this talent.
Another advantage of Kelly Criterion is that the system is relatively easy to use. Once you have done the calculations a few times then it becomes easy and if you need help there are a number of free Kelly Criterion calculators online. The system also helps you find bets that don’t pay value. When the formula gives a number with a negative number, then you have a useful warning that says not to bet.
Disadvantages
There are two primary drawbacks to Kelly Criterion. The first is that it depends on your ability to accurately and consistently calculate the correct probabilities for your bets. If your probability calculations are not correct or are inaccurate, then the form will lead you to play with incorrect bets and not use your bankroll optimally
The other disadvantage is a system can be very aggressive. In the proposed formula it would say that a player should use 40% of his bankroll. This is a very high number, especially considering that most players rarely play for more than 5% of their bankroll in a bet. Therefore, it is also normal to halve or divide even more of the suggested recommendation to protect one’s bankroll.
Summary
Kelly Criterion is based on solid mathematics and has many advantages. For those who are used to and can figure out how to calculate probabilities correctly, it offers a more dynamic way to maximize winnings. It is important to remember that Kelly Criterion is a system for calculating stakes. It cannot identify potential bets and is not an automatic way to ensure profit. It should therefore be used with caution, especially for those new to sports betting.