What is the Kelly Criterion in Sports Betting?
One of the most advanced betting strategies out there is the Kelly Criterion, used by both sports bettors and investors. It’s said to be the “truest” sports betting strategy. So what’s it all about? Should you look to adopt the Kelly Criterion in your sports betting game?
Who Created the Kelly Criterion?
Computer scientist John L. Kelly devised his eponymous formula as part of a paper he wrote in 1956. Kelly originally developed the formula to help his company with its long-distance telephone signal noise issues. It went on to become a revered staking plan among sports bettors and stock market investors striving to gain an edge. It was picked up upon quickly by the betting community, who realized its value as an optimal betting system, since it would allow gamblers to maximize the size of their earnings.
Legendary investor & billionaire Warren Buffet is said to be an advocate of the Kelly Criterion.
How does the Kelly Criterion Work?
The Kelly Criterion is a money management formula that calculates the amount you should bet when there is a difference between the “true” odds and the given odds.
So let’s imagine you could play a game where you stake $100 on a dice roll. You win $100 if the dice shows up as a 1, 2, or 3. You lose $100 if the dice shows up as a 4, 5 or 6. This is identical to placing a sports wager at +100 odds.
Typically, when a dice is thrown, the chance of it landing on a 1, 2, or 3 is 50%, while the same percentage applies to an outcome of 4, 5, or 6.
Now, let us imagine that the dice can rest on a 1, 2, or 3 with a probability of 60%, meaning the probability of it landing on 4, 5, or 6 is 40%. The variables will look as follows:
- b = 1 (your odds, the same as +100 in sports betting)
- p = 0.60
- q = 1 – 0.60 = 0.40
Based on the Kelly criterion, K% = (1 × 0.60 – 0.40) / 1 = 0.20 or 20%.
Therefore, the formula suggests that you stake 20% of your bankroll on the dice showing up 1, 2 or 3 if you are paid out at +100 odds (e.g. bet $100 to win $100). If the dice bias were less, say 53%, the Kelly Criterion recommends staking 6%.
If you repeatedly bet too much (over 20%) on a low number appearing, there’s a good chance you’ll eventually go broke. Conversely, under-betting (less than 20%) should produce a more modest profit.
Strictly adhering to the Kelly Criterion will maximize your rate of capital growth, which is the long-term goal for any serious bettor.
What Does the Kelly Criterion Mean in Sports Betting Terms?
Lets say we have the NY Knicks facing the Boson Celtics in the NBA, with the Knicks odds coming in at -110, which means their percentage of winning is 52.5%. However, your analysis indicates that the Knicks true odds are significantly better; you believe they have a 55% implied probability of winning the game. That’s around -120 in odds.
Using the Kelly Criterion, the calculation is:
- b = 1.9 – 1
- p = 0.55
- q = 0.45
- (0.9 × 0.55 – 0.45) ÷ 0.9 = 0.05
When you apply the Kelly formula, the result would be that you have to put 5% of your sports betting bankroll on the Knicks.
However, it’s important to note that you should only bet when f > 0 (the fraction of the bankroll is greater than zero). If the calculation spits out zero or a negative number, it means the criterion suggests betting nothing and walking away because the odds aren’t in your favor. For example, if you assesses the Knicks chances as 50/50 (+100 “true” or “fair” American odds), or 2.0 in decimal odds, then the Kelly Criterion formula is: (0.9 × 0.5 – 0.5) ÷ 0.9 = –5.55. You would not wager at -110 odds.
Conclusion and Half / Third Kelly
Overall, the Kelly Criterion is widely considered a smart and disciplined staking strategy, as opposed to simply betting level stakes. One potential downside is that you’ll need to accurately assess the percentage chance of a selection winning, so it may be wise to experiment with ‘paper’ bets to see how you get on.
Because the formula spits out a high staking % when you have a significant edge, it wouldn’t be wise, in my opinion, to be betting more than 5% of your bankroll on any one wager. For that reason, many people use half or quarter Kelly. When the formula spits out the percentage to bet, you must then cut that in 1/2 or 1/3 depending which you decide to run in your strategy. Sometimes Kelly could spit out a suggested betting % of 20-40% which is highly unadvisable. This is the reason people use a lower staking plan than the true suggested Kelly one.
As a rule, no sports better should risk more than 5% of their bankroll on any one bet if they wish to be successful long term. If all this number-crunching is too arduous, you’ll find plenty of handy online Kelly Criterion calculators and mobile apps to do all the hard work for you.