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Managing Your Bankroll with the Kelly Criterion

April 14, 2021
Kelly Criterion Explained - Sports Betting Strategy

If you are a sports bettor looking for an edge, one of the simplest things you can do to achieve success is manage your bankroll. If you are not managing your money correctly, you are more likely to take on higher betting risk than you can afford. It is one of the easiest ways to watch your betting account go negative.

There are a number of ways to manage money, but how exactly can you manage it in an effort to win more bets? One of the more successful bankroll management strategies is employed by numerous sharp bettors. It is the Kelly Criterion method.

What is the Kelly Criterion?

Developed in the 1950s, the Kelly Criterion is still used as an investment strategy. In 1956, J.L. Kelly worked as a researcher at Bell Laboratories. He developed his idea as it pertained to investments and the likes of Warren Buffet have used the Kelly Criterion as a legitimate investment strategy.

The Kelly Criterion – also known as the Kelly bet or Kelly strategy – essentially identifies the appropriate amount to wager on a single bet. When using the unit approach, a bettor simply wagers the same amount on every bet no matter the circumstances. A unit bettor may simply wager $20 on every single bet. Using Kelly’s method, bet sizes will vary.

Kelly’s idea of this investment strategy is expressed as the following mathematical formula:

(BP – Q)/B

B, in this case, is the decimal odds of a certain bet minus 1. P is the probability of winning the bet and Q is the probability of not winning. Using this formula, bettors can predetermine the size of their wager.

Examples Using Kelly Criterion

One of the easiest ways to look at the Kelly Criterion is using the simple coin flip. Let’s say a coin turns up heads 55 percent of the time. The moneyline odds are +100, which expressed as a decimal is 2.00.

Using this example, B would be equal to 1 (2 – 1 = 1). P is equal to 0.55 (heads comes up 55 percent of the time) and Q is equal to 0.45 or 1 – 0.55. Knowing these values, we can substitute them into the Kelly Criterion formula and get the following:

[(0.55 x 1) – 0.45] / 1 = 0.10 or 10 percent

In this situation, a bettor should wager 10 percent of the bankroll on this coin flip. If the bankroll was $100, the bet would be $10. If the bet is a winner, the next bet would be higher. If it is a losing bet, the next wager will be lower than the original.

Here’s how the Kelly Criterion would be used in a sports bet. Take an NFL regular season game like Pittsburgh against Baltimore. The Ravens are a -110 favorite at home. That equates to roughly 1.9 in decimal odds. The implied probability of winning is 52.38 percent, but your research tells you the Ravens have more like a 55 percent chance of winning.

With the all the information given, we can substitute into the Kelly Criterion formula to calculate the size of the bet.

(0.9 x 0.55 – 0.45) / 0.9 = 0.05

The Kelly Criterion indicates that a better should wager five percent of the total bankroll. It’s important to note that a positive percentage implies favorable odds. Bettors should only be wagering when the fraction of their bankroll is greater than zero.

If the result of the calculation above had been zero or a negative number, this means that the Kelly Criterion is suggesting the bettor to walk away. The odds would not be in the bettor’s favor.

Using the Kelly Criterion

The strategy that started in the investment world has paid off for those that have used it. It has also been used effectively by sports bettors. The Kelly Criterion is not, however, a magic solution that will automatically grow a bankroll. Like any betting strategy, it must be used correctly and consistently.

One of the biggest downfalls of using the Kelly Criterion is that it requires a precise calculation as to the likelihood of an event outcome. There is no guessing. Bettors must have the exact amounts for winning and losing percentages. These numbers can be tricky to acquire at times. Another disadvantage is that bettors can only use the Kelly method for single bets. Multiple bet scenarios are not recommended.

The Kelly Criterion will not automatically put a bettor on the fast track to finding that pot of gold. It is a great way to manage risk, but it requires discipline to see it through in the long run. The method will work to manage a bettor’s money, but the bettor still has to find value on the betting board.

 

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