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How to use the Kelly Criterion | ProTipster Academy

How to use the Kelly Criterion | ProTipster Academy

One of the most overlooked things when learning how to bet is understanding just how much money to bet. Managing your bankroll is an important skill  to have if you are to make a consistent long term profit; and understanding how to use the Kelly criterion is one of the most popular methods of doing this.

What is the Kelly Criterion?

The Kelly Criterion is a mathematical formula developed by a researcher called J. L. Kelly in 1956. The criterion is a method developed to maximise the potential return of any particular bet or investment, and can be applied to any form of sports betting. There is a level of complexity involved in its use along with a degree of risk but the Kelly Criterion remains one of the most well-known betting strategies.

The criterion is a way of working out what percentage of your bankroll you should use on any given bet. The higher the expected probability of a bet winning, the more money you should stake on your bet.

The formula is written as follows

(bp – q) / b = f

Where:

  • B is the decimal odds -1
  • P is the probability of the bet winning
  • Q is the probability of the bet losing (1 – p)
  • And F is how much of your bank roll you should bet.

How does the Kelly Criterion work?

The easiest way to explain the Kelly Criterion is to use an example, which we’ve set out below. In this example, we’re betting on a match between Arsenal and Manchester United, where the odds against Arsenal winning are 4.00 and the probability of them winning is 35%.

That means:

  • B = 4.00 -1 = 3.00
  • P = 0.35
  • Q =0.65

and when put into the Kelly Criterion formulae, this gives us:

  •  ((3*0.35)-0.65)/3 = f
  • (1.05 – 0.65)/3 = f
  • 0.4/3 = f
  • 0.4/3 = 0.1333

Therefore, according to the Kelly Criterion we should bet 13% of our bankroll on this bet.

Value and the Kelly Criterion

One of the most common principles that professional gamblers adhere to is one of betting on value. Value is defined whereby the odds offered against an outcome happening are better than the probability of it happening. Betting on true value bets in the long term will consistently deliver profit as the statistics even out any anomalies.

The Kelly Criterion is a good way to identify profit as it will only tell you to stake money on a bet if the bet is value; any bet yielding negative figure using the Kelly Criterion should be left well alone.

The example above shows how this has worked. If a bet is priced at 4.00 then it should have a probability of happening of 25%; however as the actual probability of Arsenal winning is given as 35% the bet on Arsenal is value even if it is unlikely to happen.

Problems with using the Kelly Criterion for betting

One of the chief problems with the Kelly Criterion is that it depends on the user being able to accurately state how likely an event is to happen – which is not easy at all when it comes to football for instance. If this part of the equation isn’t correctly worked out, then the whole formula falls apart because the amount it tells you to stake will be wrong.

Similarly, even if these figures are true there are other complications. If the difference between odds and probability are sufficiently large, the Kelly Criterion aggressively favours putting money on – which might not sit comfortably with the more cautious punter.

Summary

As with most betting systems, when you understand fully how to use the Kelly Criterion for betting you will know that it’s not perfect and does not offer guaranteed returns. However, what it does do is offer a guideline  to work out which bets offer value and thus what bets should be backed over others.

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