The Kelly Criterion is a mathematical formula used to determine the optimal amount to bet, aiming to maximize growth over time while controlling the risk of significant loss. Commonly applied in investments, gambling, and portfolio management, the Kelly Criterion helps balance risk and reward, offering a structured approach that, when used wisely, can prevent excessive losses and improve long-term gains.
Developed by John L. Kelly Jr. in 1956, the Kelly Criterion is based on the probability of winning, the probability of losing, and the payout odds of a given bet or investment. By calculating the percentage of the bankroll to wager on each bet, the Kelly Criterion provides guidance for maximizing growth without jeopardizing your entire capital.
The formula for the Kelly Criterion is as follows:
f* = (b × p - q) / b
Where:
Let’s say you have a $1,000 bankroll and are considering a bet where:
Using the Kelly formula, we find:
f* = ((1 × 0.6) - 0.4) / 1
f* = (0.6 - 0.4) / 1
f* = 0.2 / 1
f* = 0.2
suggests that you should wager 20% of your bankroll on this bet. So with a $1,000 bankroll, you would bet $200.
Imagine you want to bet on an NBA game where:
Now, applying the Kelly formula:
f* = ((1.5 × 0.60) - 0.40) / 1.5
f* = (0.90 - 0.40) / 1.5
f* = 0.50 / 1.5
f* = 0.333
This result means you should bet 33.3% of your bankroll on this bet.
If you're betting on LeBron James to score over 25.5 points, and you estimate:
Applying the formula:
f* = ((1.0 × 0.55) - 0.45) / 1.0
f* = (0.55 - 0.45) / 1.0
f* = 0.10 / 1.0
f* = 0.10
This means you should bet 10% of your bankroll on this wager.
The Kelly Criterion is popular because it provides a logical and disciplined approach to betting that considers both the probability of success and the magnitude of the potential gain, balancing the desire for growth with the need to avoid excessive risk.
The Kelly Criterion has become popular among professional bettors and investors due to its rational and disciplined approach.
Here are some of the primary benefits:
Despite its advantages, the Kelly Criterion has limitations:
To mitigate some of the risks and volatility, many bettors use a “fractional Kelly” approach, such as the half-Kelly. This sports betting strategy involves betting a smaller portion—often half of the suggested full Kelly amount—balancing growth with a more conservative risk level.
Referring back to the previous example, where the full Kelly recommends betting 20% of the bankroll:
This approach sacrifices some potential gain but reduces the risk, appealing to bettors or investors who want to preserve capital while still taking advantage of the Kelly Criterion’s principles.
The Kelly Criterion isn’t just useful in sports betting; it’s also applied in investment and portfolio management. Investors can determine position sizes based on the probability of an asset increasing in value relative to the risk-free rate of return. For example, a stock investor might use historical data to estimate a stock’s growth probability and apply the Kelly formula to allocate a portion of their portfolio to that stock.
The Kelly Criterion can be a powerful tool for managing risk and maximizing long-term gains, especially in areas where probabilities and odds are well understood. However, it requires an accurate estimation of probabilities to be effective. It’s most suitable for those who are willing to take calculated risks and have confidence in their ability to assess odds.
For individuals wary of the volatility that comes with betting large fractions of their bankroll, fractional Kelly may provide a better balance. This “half-Kelly” approach is particularly popular in stock trading, where the risk can be substantial, and many investors prefer to minimize the impact of losses.
Even if the Kelly formula suggests betting a high percentage, consider a "fractional Kelly" strategy (e.g., betting only half of the recommended amount) to reduce risk.
If your probability of winning is too low compared to the odds offered, skip the bet. The Kelly Criterion helps you avoid bad bets.
Avoid overestimating your chance of winning. Use statistical analysis, betting models, and expert predictions to make accurate probability estimates.
If you're placing multiple bets, adjust your stakes accordingly to avoid overexposure.
The Kelly Criterion works best for sports betting or financial investments where probabilities can be estimated. For games like roulette or slots, fixed betting strategies are better.
As a sports bettor, implementing the Kelly Criterion on a trusted sports betting platform like OKBet can enhance your betting experience by bringing strategy and discipline to your bankroll management. OKBet provides a reliable environment where you can apply these principles to a variety of sports and gaming events. With up-to-date odds and an extensive range of sports to bet on, OKBet helps you make informed decisions and enjoy a more calculated betting experience.
So, if you’re ready to bring calculated strategies into your sports betting, sign up now and place your bets!
The Kelly Criterion is a mathematical formula that determines the optimal bet size based on the probability of winning and the odds offered. It helps maximize long-term bankroll growth while minimizing the risk of losing everything.
To use it, calculate: f∗=bp−qbf^* = \frac{bp - q}{b}f∗=bbp−q
Then, bet that fraction of your bankroll if it's positive. If it's negative, don't bet.
In sports betting, you estimate the probability of winning a bet and compare it to the bookmaker's odds. If the Kelly formula suggests a positive bet size, you wager accordingly to maximize long-term gains.
The Kelly Criterion works poorly in most casino games like roulette or slots, where the house edge is fixed, and there is no way to estimate a "true" probability advantage.
Yes, when applied correctly, it helps professional gamblers and investors manage risk and optimize profits. However, it requires accurate probability assessments and works best in sports betting or investing.
A Kelly Criterion calculator is an online tool that automatically calculates your optimal bet size based on your estimated probability of winning and the given odds. Many sports betting websites offer free calculators.
