How to Use the Kelly Criterion for Betting

While wagering is a delicate combination of impulses, knowledge, luck, and mathematical edges, one cannot overstate the value of the latter. That’s why learning the Kelly Criterion is so useful. It makes it possible for you to more accurately determine how much you should stake.

Developed in 1956 by a Bells Labs scientist named John Kelly, the formula works by applying the then-newly created field of Information Theory to gambling and investment. It calculates the proportion of your net worth to wager to maximise the expected logarithm of capital increase.

The Bettor’s 6 Questions

Before betting, you need to consider 6 important questions:

  1. Who?
  2. What?
  3. When?
  4. Where?
  5. Why?
  6. How?

Let’s say you’re thinking about staking on the English Premier League. You’ll adapt and answer the 6 questions as follows:

  1. Who to wager on? Chelsea Football Club.
  2. What bet will you make? Top 4 Finish.
  3. When are you going to stake? Now.
  4. Where to bet at? The online bookmaker with the best odds.
  5. Why are you wagering on this team? They seem to have been under-priced.
  6. How much are you going to stake?

This is the answer we’re going to spend some time on!

Figuring Out How Much to Bet

When you make a financial decision, it’s important not only to find adequate products to invest in but also to consider how you’re going to subdivide your portfolio. This follows through to staking, where it’s not just a question of who you’re putting money on, but how much you’re going to spend.

Essentially, the Kelly Criterion determines what proportion of your available funds you should wager when odds are higher than expected. It looks like this:

(BP – Q) / B

B represents the decimal odds -1, P the probability of the bet’s success, and Q how likely it is to fail, or 1-p

Let’s use a coin as an example of using the Kelly criterion to determine the value of your stake. In this instance, you are wagering on the coin to land on heads at 2.00, but the coin is biased, so there’s a 52% chance of it landing this way. So B is 2-1 =1, P is 0.52, and Q is 1-0.52 = 0.48. This means you’re looking at:

(0.52×1 – 0.48) / 1 = 0.04

So in this instance, the Kelly Criterion recommends you bet 4% of the money available to you. The positive percentage implies that there’s a mathematical edge in favour of your bankroll, so your cash grows exponentially.

If you apply the Kelly Criterion in a situation where you receive a negative percentage as your result, it is implied that you do not place the bet in question.

The Advantages of the Kelly Criterion

Many bettors prefer the Kelly Criterion over staking systems like the Arbitrage and Fibonacci methods because it lowers their risk so drastically. The one possible challenge to using it, however, is that it requires that you precisely calculate the likelihood of an event’s outcome and the discipline it asks of users means your bankroll will see steady, not explosive, growth.