**Disclaimer *** This is a guide to this strategy and not a recommendation to use it, proceed at your own risk.
The Kelly Criterion is a popular betting strategy among professional gamblers, as it takes into account both the probability of winning and the potential payout. By using this mathematical formula, you can calculate the optimal amount to bet, based on your perceived edge over the bookmaker. This can help you avoid overbetting, which can lead to big losses, and underbetting, which can limit your potential profits.
If you’re serious about sports betting, you need to have a solid betting strategy in place. The Kelly Criterion is just one of many betting strategies out there, but it’s one that has been proven to be effective over time. By using this formula, you can make more informed decisions about how much to bet on each game, and increase your chances of making a profit in the long run.
Understanding the Kelly Criterion
Origins and Principles
The Kelly Criterion is a mathematical formula used in sports betting to determine the optimal amount of money to bet on a given outcome. It was developed by John Larry Kelly Jr., a researcher at Bell Labs, in 1956. The principle behind the formula is to maximize the expected value of a bet by taking into account the probability of winning and the potential payout.
The Kelly Criterion is based on the idea that a bettor should only bet a percentage of their bankroll that corresponds to the perceived edge they have over the bookmaker. In other words, if you think you have a 60% chance of winning a bet, you should bet 60% of your bankroll.
Mathematical Formula
The Kelly Criterion formula is as follows:
f = (bp – q) / b
Where:
- f = the fraction of the bankroll to bet
- b = the odds received on the bet
- p = the probability of winning
- q = the probability of losing (1 – p)
To use the formula, you need to estimate the probability of winning and the odds of the bet. For example, if you think a team has a 60% chance of winning a match and the odds are 2.0, you would plug in the values as follows:
f = ((0.6 x 2) – 0.4) / 2 f = 0.1
This means you should bet 10% of your bankroll on the bet. If your bankroll is £100, your bet size would be £10.
It’s important to note that the Kelly Criterion can be a powerful tool when used correctly, but it can also be risky if used improperly. It assumes that you have accurate estimates of the probability of winning and the odds of the bet, which is not always the case. It’s also important to use a sensible bankroll management strategy to avoid losing your entire bankroll on a single bet.
Overall, the Kelly Criterion is a useful tool for sports bettors looking to maximize their expected value, but it should be used with caution and only after careful analysis of the underlying probabilities and odds.
Applying the Strategy
This is a well-known strategy that can help you determine the optimal stake for any given bet. By using this strategy, you can maximize your winnings while minimizing your risk of losing money.
Calculating the Optimal Stake
To calculate the optimal stake, you need to know the probability of winning the bet and the odds offered by the bookmaker. Once you have this information, you can use the following formula:
(P * (Odds + 1) - 1) / Odds
Where P is the probability of winning the bet and Odds is the odds offered by the bookmaker. The result of this formula is the optimal stake, expressed as a percentage of your betting bankroll.
For example, let’s say you believe that a particular bet has a 60% chance of winning, and the odds offered by the bookmaker are 2.00. Using the formula above, the optimal stake would be:
(0.6 * (2.00 + 1) - 1) / 2.00 = 0.10
This means that you should bet 10% of your betting bankroll on this particular bet.
Using the Kelly Criterion Calculator
Calculating the optimal stake using the Kelly Criterion formula can be time-consuming, especially if you have multiple bets to consider. Fortunately, there are several calculators available online that can do the work for you.
To use a Kelly Criterion calculator, you simply need to enter the probability of winning the bet and the odds offered by the bookmaker. The calculator will then tell you the optimal stake, expressed as a percentage of your betting bankroll.
It’s important to note that while the Kelly Criterion can be a useful tool for managing your betting bankroll, it’s not foolproof. There is always a risk of losing money when you bet, no matter how carefully you manage your stake. It’s important to bet responsibly and never risk more than you can afford to lose.
Kelly Criterion in Sports Betting
Football Betting
The Strategy can be applied to football betting. It takes into account the expected value of each bet, the odds of winning, and the size of the bet. For instance, if you think that a team has a 60% chance of winning a match, and the odds are 2.00 (decimal odds), the Kelly Criterion formula will tell you the optimal amount to bet.
Here is the formula:
(bp - q) / b
Where:
- b = decimal odds – 1
- p = probability of winning
- q = probability of losing = 1 – p
- bp = b * p
Let’s say that you have a bankroll of £1000, and you want to bet on a match with decimal odds of 2.00. You believe that the team you are betting on has a 60% chance of winning. According to the formula, the optimal amount to bet is £200:
(0.6 * (2.00 - 1) - 0.4) / (2.00 - 1) * £1000 = £200
Value Bets
The Strategy is particularly useful for value bets. A value bet is a bet where the odds are in your favour. For instance, if you think that a team has a 70% chance of winning a match, but the bookmakers are offering odds of 1.80 (decimal odds), then this is a value bet. According to the formula, you should bet more than you would for a bet with even odds.
The strategy is not foolproof. It assumes that you know the true probability of winning a bet, which is not always the case. It also assumes that you have an infinite bankroll, which is not realistic. However, it is still a useful tool for punters who want to maximize their profits while minimizing their risks.
In conclusion, this is a powerful tool for sports bettors who want to make informed decisions. By using this formula, you can determine the optimal amount to bet on a given match, taking into account the expected value of each bet, the odds of winning, and the size of the bet.
Pros and Cons of Kelly Criterion
Like any other strategy, it has its advantages and disadvantages.
Advantages
One of the biggest advantages is that it allows you to optimize your betting strategy. By using this strategy, you can determine the optimal amount of capital to allocate to a particular investment to maximize long-term growth.
Another advantage is that it takes into account the risk and volatility of your bets. This means that you can adjust your betting strategy based on the level of risk you are comfortable with. By doing this, you can reduce the negative outcome of your bets.
Disadvantages
One of the main disadvantages is that it requires a lot of data and analysis to be effective. You need to have accurate information about the probability of winning and the potential payout for each bet. If you don’t have this information, this may not be effective.
Another disadvantage is that it can be difficult to use in practice. It requires you to calculate the optimal bet size for each bet, which can be time-consuming and complicated. This means that it may not be suitable for everyone.
In summary, the Kelly Criterion has both advantages and disadvantages. While it can help you optimize your betting strategy and reduce the negative outcome of your bets, it requires a lot of data and analysis to be effective and can be difficult to use in practice.
Alternative Betting Strategies
If you’re looking for alternative betting strategies, then you’re in luck. There are several other staking plans that you can use to manage your bankroll and increase your chances of making a profit. In this section, we’ll take a look at two popular alternatives to the Kelly Criterion: the Martingale Strategy and the Progression Strategy.
Martingale Strategy
The Martingale Strategy is a popular betting strategy that involves doubling your bet after every loss. The idea behind this strategy is that eventually, you will win a bet and recoup all of your losses. However, this strategy can be risky, as you can quickly lose a lot of money if you go on a losing streak.
Here’s an example of how the Martingale Strategy works:
- You start by placing a £10 bet on a football match.
- If you lose the bet, you double your next bet to £20.
- If you lose again, you double your next bet to £40.
- You continue doubling your bet after every loss until you win a bet.
While the Martingale Strategy can be effective in the short term, it is not a sustainable long-term strategy. Eventually, you will run out of money or hit the maximum bet limit at the bookmaker.
Progression Strategy
The Progression Strategy is another popular betting strategy that involves increasing your bet size after a win. The idea behind this strategy is that you can take advantage of winning streaks and increase your profits.
Here’s an example of how the Progression Strategy works:
- You start by placing a £10 bet on a football match.
- If you win the bet, you increase your next bet to £20.
- If you win again, you increase your next bet to £30.
- You continue increasing your bet after every win until you lose a bet.
The Progression Strategy can be effective in the short term, but it can also be risky. If you go on a losing streak, you can quickly lose all of your profits.
Kelly Criterion in Mainstream Investment Theory
Kelly Criterion is not only applicable in sports and gambling but also in mainstream investment theory. The strategy has been used by investors to determine the amount of capital to allocate to a particular investment.
Investors use the Kelly Criterion to calculate the optimal investment size based on their perceived edge. This means that if an investor believes they have an edge in a particular investment, they can use the Kelly Criterion to determine the optimal investment size.
Warren Buffett, one of the most successful investors of all time, has been known to use a similar approach to the Kelly Criterion. Buffett’s approach involves investing heavily in companies that he believes have a competitive advantage or a “moat.” This approach is similar to the Kelly Criterion in that both strategies involve allocating capital based on perceived edge.
Diversification is also an important consideration when using the Kelly Criterion in mainstream investment theory. Investors must diversify their portfolio to avoid over-exposure to a single investment. By diversifying their portfolio, investors can reduce the risk of losing their entire investment.
Overall, the Kelly Criterion is a useful tool for investors looking to allocate capital based on perceived edge. When used correctly, the strategy can help investors maximise their returns while minimising their risk.
Frequently Asked Questions
What is the Kelly’s formula for betting?
The Kelly Criterion is a mathematical formula that helps you determine the optimal amount of money to bet on an outcome based on the probability of that outcome occurring and the payoff of that outcome. It was first developed by John Kelly, a scientist at Bell Labs, in the 1950s. The formula is as follows:
f* = (bp - q) / b
Where:
- f* is the optimal fraction of your bankroll to bet;
- b is the decimal odds – 1;
- p is the probability of winning;
- q is the probability of losing, which is equal to 1 – p.
What is a good Kelly Criterion for sports betting?
There is no one-size-fits-all answer to this question as the optimal Kelly Criterion varies depending on the specific situation. However, a general rule of thumb is to use a Kelly fraction of between 1% and 5%. This means that you should bet between 1% and 5% of your bankroll on each bet.
What is the most successful betting strategy?
There is no one betting strategy that works for everyone. The most successful betting strategy is one that is tailored to your individual needs and goals. It’s important to do your own research, develop a plan, and stick to it.
What Kelly multiplier should I use?
The Kelly multiplier is a value that you can use to adjust the Kelly fraction based on your level of risk tolerance. A conservative bettor may use a Kelly multiplier of 0.5, while a more aggressive bettor may use a Kelly multiplier of 2.0. Ultimately, the Kelly multiplier you use will depend on your personal risk tolerance and betting goals.
How does the Kelly criterion work for portfolio optimization?
The Kelly Criterion can also be used for portfolio optimization. In this context, it helps you determine the optimal allocation of your portfolio to different assets based on their expected returns and risks. The formula is similar to the betting formula but uses expected returns and standard deviations instead of probabilities.
Is there a difference between Kelly criterion for investing and betting?
The Kelly Criterion can be used for both investing and betting, but there are some key differences between the two. In investing, the Kelly Criterion is used to determine the optimal allocation of your portfolio to different assets. In betting, it’s used to determine the optimal bet size. Additionally, in investing, the expected returns and risks are based on historical data and market trends, while in betting, they are based on probabilities and odds.