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Kelly Criterion: How To Calculate The Perfect Bet Size

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Many professional sports bettors use the Kelly Criterion to find the optimal bet size.

But are there any drawbacks to the system, or should you always use Kelly Criterion for every bet?

Read on to learn more.

What Is Kelly Criterion?

The Kelly Criterion is a formula to calculate how much of your bankroll you should risk per sports bet to maximise ROI.

It takes into account how much you have to bet with and how likely your bet is going to win.

There are many different sports betting methods but the Kelly Criterion is viewed as one of the best because it ensures your bets are proportional to your perceived edge.

How Does Kelly Criterion Work?

The staking methods for Kelly Criterion are different from traditional bankroll management techniques.

This is because, as mentioned above, Kelly Criterion bets are always proportional to your perceived edge.

Kelly Criterion ensures that you never deplete your entire bankroll if you lose your bets, while exponentially growing your funds when you win.

If you go on a bad run, Kelly Criterion reduces your unit sizes in line with your remaining bankroll.

It will also increase your unit sizes when you run hot.

Kelly Criterion Formula

Here’s the Kelly Criterion formula and how you can use it for your own sports investing:

F = (BP – Q) / B

Where,

  • F = How much you should bet
  • B = Decimal Odds – 1
  • P = Probability of winning (calculated by you)
  • Q = Probability of losing (1 – P)

Let’s run through an example.

Imagine the Lakers were playing the Celtics in the NBA Finals.

The Lakers are priced at 1.690 (-145) and the Celtics are priced at 2.350 (+135).

These odds suggest that the Celtics have a 42.55% chance of winning, but after your calculations, you think they have a 45% chance of winning.

In this scenario:

  • B = Decimal Odds – 1 = 2.35 – 1 = 1.35
  • P = Probability of winning (calculated by you) = 0.45
  • Q = Probability of losing (1 – P) = 1 – 0.45 = 0.55

Therefore:

F = ((1.35 * 0.45) – 0.55) / 1.35 = 0.04

From this calculation, if you were to bet on the Celtics to beat the Lakers, the Kelly Criterion suggests you should only bet 4% of your bankroll or capital.

In another example, you may have a perceived edge of 55% (0.55) on a specific spread or total priced at -110 (american odds). In this example you’d run the same formula (using excel makes this easier). In this case it’s going to come out to approximately 5.5% of your bankroll. Personally I think that’s a bit too high for a 55% edge play. This is why we use quarter Kelly internally. In this example that means we’re risking 1.39% of our bankroll on 55% perceived edge plays that are priced at -110.

If you move this perceived edge up to 60% the Kelly bankroll at risk increases all the way up to 16% in the full and 4.01% in the quarter Kelly. If you are good enough to find these edges risking 4% might seem like a lot but it’s the optimum play.

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Drawbacks Of Kelly Criterion

Some sports bettors don’t like using Kelly Criterion because it doesn’t take market volatility into account.

In other words, you could build your bankroll quite easily with small stakes on high odds if you have a small perceived edge.

However, if you find a big edge on a small-priced event, Kelly Criterion will tell you to bet huge.

If that bet doesn’t win, your bankroll can easily be wiped out in one smooth swing.

So, the Fractional Kelly was created to overcome this issue.

Kelly Criterion bets are proportional to your edge and stop you from going broke.

Sports bettors adopt a 50%, 25% or 12.5% Kelly Criterion bankroll management strategy, using the same portion every time.

For example, if Kelly Criterion suggests you must bet 20% of your bankroll and you’re using 25% Kelly, you would bet 5% of your bankroll instead.

Sports bettors adopt a 50%, 25% or 12.5% Kelly Criterion bankroll management strategy, using the same portion every time.

For example, if Kelly Criterion suggests you must bet 20% of your bankroll and you’re using 25% Kelly, you would bet 5% of your bankroll instead.

Another drawback to Kelly Criterion is not knowing how to handle multiple edges on concurrent bets.

For example, what happens if you have an edge on both Lakers @ Celtics and Clippers @ Heat but both matches are playing at the same time?

Further, in the 1X2 betting market, there’s a possibility that many of the outcomes give you an edge.

In both situations, depending on the number of games playing at the same time and your perceived edge, the Kelly Criterion can easily suggest to bet a size that uses the majority of your bankroll.

In some cases, it may even tell you to bet more than your bankroll!

Finally, you must also consider if the Kelly Criterion matches your bet style.

Sports investors dedicated to finding an edge and learning how to develop a strategy will benefit from the Kelly Criterion.

On the other hand, recreational or casual players that bet for fun at the weekend should stick to either the unit approach or the bankroll percentage approach.

Conclusion

If you are new to sports betting, Kelly Criterion probably isn’t for you.

For investors though, it’s a must.

But now we want to hear from you.

Have you used Kelly Criterion before? What was your experience?

Let us know by leaving a comment now or let us know on Twitter.

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