What is the Kelly criterion? And when it was created?
Kelly’s criterion is a betting strategy, or rather, bankroll management, developed by John L. Kelly in 1956. Its essence is in determining the size of the bet as a percentage of the player’s cash. The strategy has dead zones when the amount of the bet is less than the minimum in the bookmaker. The criterion can be used in all areas where there is an estimate of the probability of an outcome: sports betting, casino games, poker, blackjack, etc.
If you use the Kelly criterion, then you can easily determine how much money is worth betting on certain events. At the same time, one cannot but warn potential and real players that the Kelly approach has already been recognized as partially effective, and this strategy does not guarantee a stable income with prolonged use. A considerable number of experts in the field of betting attributed this system to frivolous approaches, and even called Kelly “the Kamikaze criterion”. In addition, such analysts emphasized that the use of this strategy leads to a “complete loss of the bank.”
The effectiveness of the theory boils down to three aspects:
- Mathematical analysis of the odds.
- Deep understanding of sports disciplines.
- Financial literacy.
At the forefront is the assessment of the probability of the onset of one or another outcome. Correctly calculating the probability without a deep understanding of the sport is problematic. Not to mention the basics of bank management in betting.
Kelly criterion formula: how to calculate amount of bet?
The general form of the formula by which it is best to calculate the optimal value of bet when using a concept such as Kelly criterion is as follows:
S = ( K * B – 1 ) / ( K – 1 ) * V
S – determined bet amount;
K – odds of the event;
B – probability of the outcome (according to the player);
V – the size of the game bank.
For example, in a conditional match between teams “A” and “B”, the bettor rated the victory of team “B” at 40% or 2.5 odds. Having opened the bookmaker’s line for the match, he saw a 2.75 odds for a “B” victory or a 36% chance of an outcome. Therefore, the Kelly criterion can be used to determine the size of the bet, since the probability of a bettor is higher than the probability of a bookmaker. With a conditional bank of 100 units, we get: (2.75 * 0.4-1) / (2.75-1) * 100 = 5.7%. That is, in theory, no more than 6% of the total bank of 100 units should be put on the bet.
How to use the Kelly criterion correctly?
One of the most important conditions for applying this criterion, not just on paper, but with success, is the acquisition of the ability to correctly assess the likelihood of a “run” of a particular scenario. Another condition implies that if the probability that the event will happen is less than this probability, but the bookmaker, then you can’t bet in this case. In other words, you need to place bets only on outcome scenarios that are underestimated by bookmakers. Finally, another condition for the correct use of such a strategy as Kelly criterion in sports betting is to call the fact that you should not put the entire existing game bank in just one bet made.
How to calculate odds in Kelly criterion?
Kelly сriterion management can increase your bankroll if used wisely. The difficulty lies in correctly assessing the probability of an outcome (odds). Each player determines the probability of the event (odds) on the basis of the source data available to him. The bank grows rapidly if the player is versed in sports discipline or familiar with probability theory. To consistently earn money, learn to determine the chances of outcomes more accurately than analysts at bookmakers. This is the nuance of the complexity and possible inoperability of the methodology for most players.