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What is the Kelly Criterion and how is it calculated?

28th February 2019 / Julian
Betting Advice

The origins of the Kelly Criterion

The formula was invented by John Larry Kelly Junior, a scientist, in the late 1950s. Although John Larry Kelly himself is reported to never have used the formula, his colleague Claude Shannon who helped create the Kelly, did. Shannon is said to have made a fortune on blackjack and roulette in Las Vegas, using the method. Since the it has been a stalwart of not only casino goers and bettors, but investors too.

Many successful billionaire entrepreneurs are said to have used the Kelly Criterion to their significant financial advantage when deciding how much to invest in holdings. So not only will you hear the term bandied about in gambling, but in the world of stocks and shares too.

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Does it work?

As with most of these widely available strategies the reviews are mixed. Kelly formula betting is arguably the most respected and revered gambling method out there, but it does have its harsh critics. Larry Kelly junior’s own assessment of the method was that it works best “when the investment or ‘game’ is played many times over, with the same probability of winning or losing each time, and the same payout ratio”.

This, therefore, isn’t so great for sports, where there are many more variables than gambling at something like slot machines, for example. But there are ways to optimise it to fit the needs of events with less than precise probability. One of the most recommended ways to do this is to employ a “fractional Kelly”, thereby reducing the wagering amount suggested in the Kelly formula, by a percentage. Many people use a half-Kelly, staking 50%.

Using a Kelly Criterion calculator

Thanks to the wonderful world of the web, everything we could ever need is at our fingertips, instantly, and this includes all kinds of betting calculators. So you have the option to punch all your numbers into one of those, or challenge yourself to some maths. The basic formula to calculate your Kelly Criterion stake is as follows:

[(Probability multiplied by odds) – 1] divided by (odds-1)

It’s not difficult when broken down step by step, making it nicely accessible to all kinds of bettors, new and experienced alike. However, you do need to have already calculated, or found a way to calculate, your probability.

To calculate a fractional Kelly, all you must do is multiply your resulting figure by your desired fraction (ie. x 0.50 for a half Kelly).

For beginners, we’d advise starting carefully, with 10% of your Kelly, especially if you have a limited bankroll with which to play. However, in order to start seeing bigger wins, you will have to adopt a more aggressive approach, with a 50% or half-Kelly, being a good figure for improvers and advanced bettors.

Start a spreadsheet

A spreadsheet for your system is an ideal way to let technology do the work for you. Inputting the Kelly formulas up front means you only have to add the information around odds, probability and events. Plus, it’s a great way to keep track of your progress and statistics, helping you become an even better bettor in the long run. While it may seem like overkill if you’re just starting out, it’s well worth being methodical from the outset, especially if you want to see steady returns. So now you know all about the Kelly Criterion method, why not give it a go?

The tip is based on the personal opinion of the author. No success is guaranteed. Please gamble responsibly. 18+

* All mentioned odds were valid at the time of writing. Betting odds are subject to fluctuations. Please check the current odds with the respective bookmaker!

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