Kelly Criterion

Kelly Criterion Sports Betting

The Kelly criterion for betting was developed by J.L. Kelly, Jr. He described his theory in the Bell System Technical Journal in 1956. In essence, the Kelly system is a progressive method of wagering in which bettors wager more when there is a higher probability of winning and less when there’s a lower probability of winning.

Over the years, many handicappers, sports bettors and mathematicians have tested the system in a variety of ways. Most agree that it’s better to risk less than recommended by the Kelly criterion and that at best the system should be used not as a rule but as a guideline. Often you may here gamblers say they are using 1/2 or 1/4 kelly. These are all just dialed down versions of the Kelly Criterion formula.

One reason to use the Kelly criterion as a guideline is that following it without any type of adjustment takes the individual gambler and their acquired knowledge out of the wagering equation. Because it is in effect a mathematical equation, some argue that Kelly takes away human reasoning, while others note that no system is perfect and that as experience is gained tweaking is necessary in the real world of wagering.

The major problems that have been associated with the Kelly Criterion include:

• It is a volatile betting system, which can damage any attempt to practice sound money management. The shorter the odds the greater your wager. But in using the system, one could be risking 20-50% of their bankroll on one bet. That’s a big hit if the short odds turn out to be long and you lose. As an example, if you have a $1,000 bankroll and you’re wagering on 2-1 odds, Kelly says that if you have a 60% chance of winning, you should wager $399! That’s a lot of cash—40% of your roll. Most handicappers agree that bettors should use fractional amounts (about 50%) of what’s recommended by the Kelly system.

• This method of wagering asks many bettors to go beyond their psychological comfort zone in terms of risk. To some, there seems to be little room to breathe if they simply follow the Kelly criterion. This can be psychologically taxing. When using this system, bettors have to take into consideration what they are truly willing to risk and their comfort zone when it comes to wagering.

• Calculations regarding your next wager are based on the numbers you input and calculate using the Kelly formula. There are online calculators available, which can be helpful in ensuring you’re wagering the correct amount. However, if any of your numbers are wrong, the system will not work. Accuracy is essential.

• Although the system can result in big payouts over time, it has no high or low limits. That means that the Kelly criterion could result in a number of single wagers that put a majority of your bankroll at risk. One big loss can wipe out huge gains.

Kelly Criterion normally fails for most bettors because they cannot accurately estimate their true winning percentage. Almost all gamblers overestimate the edge they truly have and this is normally the reason sports gamblers lose betting with Kelly Criterion.

Over the years, gamblers have utilized the Kelly criterion successfully, but if it’s used carelessly or blindly, then the results can be disastrous. So remember— “Gambler beware and use the Kelly system wisely.”