Kelly Criterion In Betting Explained

Some believe that in gambling, everything is decided by luck, which cannot be influenced in any way. However, in my opinion, the role of luck in crypto sports betting is significantly reduced. After all, in order to become a successful bettor, you don’t have to be a darling of fate, you just need to understand strategies and staking formulas. The more you study the features of sports gambling, the more you experiment with betting systems, and the more independent of luck you become.

That’s why the Kelly criterion is one of the most popular ways to help make your gambling as effective as possible. This is a staking formula that allows gamblers to maximize their profits by determining an optimal bet size.

In my review, I will explain what the Kelly criterion is, how the formula works, and explore its main features. I will also give examples of how this strategy is used in practice and analyze the strengths and weaknesses of the Kelly formula.

What Is Kelly Criterion In Sports Betting?

The Kelly criterion is a mathematical formula that helps determine the optimal wager size. In probability theory, you can come across such names as Kelly strategy or Kelly wager. This staking system owes its name to the Bell Labs scientist J. L. Kelly Jr., who developed the theory of a new financial betting strategy in 1956. It is noteworthy that this strategy is applicable not only for gambling but also for investing.

The Kelly criterion betting strategy is based on the use of the mathematical formula that calculates the wager size. This formula determines wager sizes as a percentage of your funds. The strategy is complex in that it requires a correct assessment of the probabilistic outcome. To help gamblers maximize their profits from winning wagers, the formula weighs the winning and losing odds.

The Kelly formula looks like this: f = (bp – q) / b.

Below, I have described what each letter in the formula means so that you can learn to read it and use it correctly:

• f stands for the wager size based on a percentage of the bankroll.
• b stands for the stake’s decimal odds – 1 (for example, 3.0 odds – 1 = 2).
• p stands for the probability of winning the stake (for example, 45% chance = 0.45).
• q stands for the probability of losing the wager, which is expressed as 1 – p (for example, 1- 0.45 = 0.55).

If you are going to use this Kelly criterion sports betting formula, keep in mind that for those who are used to American odds, it may be difficult to understand decimal odds at first. Though, it is in this form that odds are presented in classical European gambling. If you are a beginner, it is best to choose a bookmaker site where you can switch between American and decimal odds. In addition, there are odds conversion charts freely available online.

How Does The Kelly Criterion Work?

After we’ve figured out what the Kelly criterion is, we may take a closer look at how it works. Let’s start with the reason why there is a need to use the Kelly formula at all. The fact is that many gamblers underestimate the importance of the size of the wagers they place. They decide on the size of the wager by superficially assessing their bankroll and without calculating the possible gain or loss. As a result, they simply miss out on profitable opportunities by staking large sums on less favorable results.

The Kelly criterion betting system is the best solution to this problem. Thanks to the formula, the optimal bet size is determined based on the specific situation conditions. The formula involves the known object (the staking odds) with two assumed variables (losing and winning probabilities).

Remember that success with the Kelly criterion largely depends on your handicapping skills. That’s why I suggest everyone who is not confident in their abilities study sports handicapping tips before introducing the Kelly system into their gambling for real money.

Let’s look at how it works with an example: 

The team you are interested in has +250 odds (3.5 decimal). Odds +250 mean 28.6% implied chance of winning. The implied probability of winning is calculated based on the explicit odds. You can use any online converter that will convert the odds into percentages. Next, you handicap the game and realize that the team’s realistic chance of winning is 35%, and the odds are +186 (here, also use the converter). That’s how you get p, which is 0.35, and q, which is 0.65. 

Your formula will be (2.5 x 0.35 – 0.65) / 2.5 = 0.09. It shows that you can wager 9% of your bankroll.

I have already mentioned that the Kelly strategy is not the simplest. You can start applying it, but you won’t see the desired result if you don’t approach this staking system responsibly. Therefore, I have prepared tips for you that will help you use the Kelly criterion sports betting formula as efficiently as possible:

• Determine your advantage. Understanding your edge (the probability of winning) before applying the formula means assessing the chances of winning a particular wager. To make the assessment, you can use statistical models, historical data, etc.
• Determine the optimal wager size. Once you have assessed your advantage, you can calculate the optimal percentage of the bankroll to bet using the Kelly formula.
• Adjust the size of your wager. Your bankroll and advantage will change over time, so it is necessary to adjust the bet size according to these changes to maintain an optimal percentage of your bankroll.
• Track your results. To make sure the formula is effective, you should monitor the results regularly. If you constantly lose, you should reconsider your advantage assessment and adjust the strategy to new data.

Kelly Criterion Example In Sports Betting

I hope that by this point, I have managed to clarify for you the main elements of the Kelly strategy. However, despite the fact that I have explained Kelly criterion in as much detail as possible, a real example will best help you understand how this system works.  Let’s look at the real betting situation for the Chicago Bulls vs. Portland Trail Blazers. For your convenience, I indicate American odds in parentheses next to the decimal odds.

• The Chicago Bulls have 3.20 (+220) odds of winning the match. The estimated probability is 31.3%. You handicap the Chicago Bulls at 2.80 (+180). Your expected chances of winning are 35.7%.
• Now, let’s prepare the data for the formula: b will be 2.2 (3.2 – 1); p will be 0.36; and q will be 0.64.
• The Kelly formula for this case looks like this: (2.2 x 0.36 – 0.64) / 2.2 =  0.069.
• This means you should wager 6.9% of your bankroll.

Pros And Cons Of The Kelly Criterion Betting System

Although the Kelly criterion is known as one of the most efficient wagering strategies, it has both benefits and drawbacks. Before deciding to apply this strategy, get acquainted with its strengths and weaknesses to make an informed decision.

Pros

• Maximizing profits in the long term. When you wager the optimal percentage of your bankroll, you get a chance to maximize the long-term profits and increase the overall ROI.
• Risk reduction. By controlling the level of risk, you minimize the chances of going bankrupt.
• Clear strategy. The Kelly formula ensures objectivity and clarity in determining the wager size, which greatly facilitates further decisions regarding stakes.
• Adjustability. Considering that the bankroll and edge change, it is important to be able to adjust the stake size.

Cons

• Accurate probabilities are required. In order for the Kelly criterion to be effective, it is necessary to get accurate assessments of your edge. Incorrect calculations won’t let you determine the optimal stake size.
• Periodic aggressiveness. The Kelly formula doesn’t consider the level and betting style of the bettor. That’s why it can offer aggressive stake sizes that are too large or confusing for some gamblers, especially those whose bankroll is small.
• Not considering other factors. You bankroll and advantage are the only factors that are taken into account by the formula. However, the game outcome can be affected by other factors such as weather conditions, injuries, etc.

Closing Thoughts

I hope that by the end of my review, I was able to provide you with an answer to the main question – how to use Kelly criterion in betting on sports. To sum up, I want to say that the Kelly formula is definitely worth your attention. Its effectiveness has been confirmed more than once. However, keep in mind that this staking system is not a simple one, and before you start implementing it in your gambling, you should take the time to study the features of this strategy.