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Kelly's criteria Betting System: how to apply Kelly's theory to betting

  • Written by David Bet
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Kelly's criteria Betting System

Kelly's Criteria was developed in 1956 by John L. Kelly. Kelly´s theory is designed to maximize the growth of your bank roll (e.g. a betting fund) over the long term by determining the optimal stake on a bet. It requires that your percentage-estimations are better than the bookmakers estimations.

 

KELLY'S CRITERIA BETTING SYSTEM

In case of that, the following formula will tell you the optimal amount of your fund to bet:

Formula: ( (odds x estimation) - 1 ) / (odds - 1)

If you multiply the result with 100, you know how many percentages to bet of your fund.

Lets make an example:

Bettingfund: $10.000
Odds: 5,00
Estimation: 0,25 (25 %)


( (5,00 x 0,25) - 1) / (5,00-1) = 0,0625

This means that you should bet 6,25 % of your fund = £625

Many punters use Kelly's formula, while some find it too risky, as it requires a lot of your percentage estimations. Even if you manage to find value bets, bets with an overrated value can cost you some money, because the stake, found with the formula, is too high. You might want to use a fraction system, e.g. divide the percentage with 2, which will minimize risk. Another opportunity is to use Kelly's formula to determine stake proportions, i.e. to help you find out how much to bet on game 1 compared to game 2. This can be done the following way:

According to the Kelly Formula you should bet 4% of your fund on game 1 and 2% of your fund on game 2. If you are going to place for example 100$ on these two games, you should use 4/6 = 66,7 % = £67 on game 1 and 2/6 = 33,3% = £33 on game 2.

Systems like Martingale and Row of numbers use high level of progresion to make up for the punters lack of margins. In these systems, stakes are successivly increased when losing, thus the punters are running a high risk of bankruptcy.

In the Kelly Criteria, progresion increases when you are winning, and decreases when you are losing. The stakes are decided by a percentage of the size of your funds. In the Kelly Criteria, the risk of bankruptcy is virtually eliminated.

The Kelly Criteria requires that the punter have the probabilities on his side. When using Kelly, it's expected that the punter can bet even with, or better than the bookmaker. If a home team has got odds = 2.0, you will only bet on the home team if you think it has a 50% chance or more.

In short, Kelly's theory says that if you can determine a somewhat correct probability for an events outcome, then the formula will determine the exact amount of your funds which you should bet on that event.

If you overestimate your ability to predict an outcome (i.e you predict a 60% chance, when the correct prediction should be 52%), you will pay for it by losing money. If you underestimate your ability to predict the outcome (i.e you predict a 55% chance, when the chance is 60%), you will win money, but not as much as if you were betting with flat stakes. This is due to the fact that Kelly's formula optimizes your stakes if you are able to predict with a high degree of accurracy.

With Kelly you make money by having only a small advantage on every game you pick. If you instead have a small disadvantage for evey game you pick (i.e you overestimate your predictions), you will lose money compared to flat stake betting


Size of your fund

A fund sized 10-15 times the size of your normal singlebet is enough. Of course these funds must be funds you can afford to lose. Remember that with the Kelly Criteria, you will not lose all your money straight away, because the stakes are decided as a percentage of the actual size of your fund.

How often, and how well you are able to pick value-objects
Experience is vey important in the art of sportsbetting.
Picking value objects correctly, and often enough, is ofcourse the trickiest part. Only by gaining experience you can become a clever punter.

Bookmakers rarely offer many value objects during a week. Do not expect to find value in more than 2-5 events during a week. When you find an object which you think has got value, check this event carefully. If the odds presented is 2.0, the team MUST have more than a 50% chance for victory, because the size of the stake is directly related to the winning probability (which is your subjective opinion).

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For how long will you continue to play with this system?

If you have set yourself a goal with your betting, finish the project when your goal is reached, and start all over again. This way you get to realise the money you've earned, and thereby strenghtening your moral and dicipline. If you've not set yourself a goal, reset your fund when it approaches 100% payoff. Remember as long as your money is in the bookmaker account, it's the bookmaker who possesses the money, not you. And what's the point of earning money when you cannot use them as you please ? Therefore, decide when to reset your fund when you have reach a predefined amount, and start it all over again. Make your earnings visible.

Lets examine the system closer:

The biggest advantage with the Kelly Criteria is that you will lose less money when your fund is low. This is due to the fact that your next stake is a percentage of the fund's actual size. When the size of the fund is low, your next stake will also be low. If your average stake is 10% of your total funds, then you can lose 6 times in a row, and still have nearly 48% of your funds left (take 0.9 and multiply with itself 6 times).
If you've got the probabilities on your side (you bet with a 10% advantage on the bookie every time), the chance of losing 10 times in a row (at odds=2.0) is 1/3000 !!!

Kelly is not a system which provides rapid changes to your account. With Kelly you make money by having the required little margin, the extra 5% on each game. If you have the margins on your side, Kelly makes your stakes increase. If you lose, stakes will decrease. As a result of this, you will not experience great changes to your account.

Consequently, Kelly is a system for punters who do not bet jut for the sake of money, but also for the sake of their own satisfaction.

 

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