What is The Kelly Criterion?
In 1956, computer scientist John Kelly developed his now-famous staking formula, "The Kelly Criterion." The formula was originally purposed to help Kelly's company reduce long-distance telephone signal noise issues. In time, however, sports bettors and Wall Street traders realized the value of the formula as an investment management system that could help protect assets and maximize earnings.
The Kelly Criterion (or simply "Kelly") is now widely recognized as the "truest" sports betting bankroll management strategy.
How Does The Kelly Criterion Work?
The Kelly Criterion helps bettors calculate the amount they should bet when there is a difference between the “true” odds and the given odds.
Let's look at an example:
Imagine you're betting on the result of a coin toss. You win $100 if the coin shows heads (+100). You lose $100 if the coin shows tails.
Of course, the true odds of the coin showing heads is 50%. The same is true of tails.
Now, let's imagine that the heads side of the coin is weighted, so that the probability of the coin showing heads is 60% and the probability of the coin showing tails is 40%.
The variables relevant for Kelly are the following:
Posted Odds = 1 (the decimal odds version of +100)
True Odds of Heads = 0.60
True Odds of Tails = 0.40
Now, applying Kelly:
K% = (1 × 0.60 – 0.40) / 1 = 0.20 or 20%.
The formula suggests that you stake 20% of your bankroll on the coin showing heads to maximize upside and minimize downside.
How Does The Kelly Criterion Apply to Sports Betting?
Let's now apply Kelly to a sports bet.
Imagine the Cowboys are playing the Eagles on Monday Night Football. Assume that the Cowboys are favored to win, and as such, the sportsbooks have set the Cowboys moneyline at -110 (52.5% implied probability; 1.91 decimal odds).
But, let's say that you believe the Cowboys moneyline is better set at -120 (55% implied probability).
You've found a positive expected value bet, but are left to decide how much of your bankroll to bet on the Cowboys moneyline.
Apply Kelly:
Posted Cowboys Moneyline = 1.91 – 1 (0.91)
True Odds Cowboys Moneyline = 0.55
True Odds Eagles Moneyline = 0.45
K% = (0.91 × 0.55 – 0.45) ÷ 0.91 = 0.055
Kelly suggests that you bet 5.5% of your total bankroll on the Cowboys moneyline.
How Can Bettors Adapt Kelly to Fit Their Strategy?
The Kelly Criterion is widely considered a smart and disciplined staking strategy. But sometimes the formula produces a bet size recommendation you might not be comfortable staking.
For instance, when a betting line is identified as having significant positive expected value, Kelly might suggest placing a bet that represents more than 15% of your bankroll.
Rather than dispensing with the formula entirely, many bettors choose to employ 1/2 Kelly, 1/4 Kelly, or 1/8 Kelly.
Using one of these "Fractional Kelly" formulas results in less aggressive potential bankroll growth and lower bankroll volatility.
By understanding what the The Kelly Criterion is, how its calculated, how it can be applied to sports betting, and how to adapt Kelly to better fit your own sports betting strategy, you can be a more confident and disciplined bettor, protecting your bankroll and maximizing winnings.