Quick summary
This article explains what the Kelly Criterion is and how it helps you decide the best amount to bet based on the odds and your chances of winning. It covers how the formula works, different types of Kelly betting strategies, and when to use it for smarter, more calculated bets. For more betting insights, explore our blog, The Advantage.
Heard of the Kelly Criterion, but not sure what it really means?
At its core, it’s a formula designed to help you take the guesswork out of staking so you can grow your bankroll steadily.
In this article, we‘ll break down how the Kelly Criterion works, why bettors use it, and how you can apply it to make more calculated decisions.
What is the Kelly Criterion and how does it work?
The Kelly Criterion is a formula that helps you figure out the optimal amount to bet based on how likely you are to win and the odds you’re given. Its goal is to maximize long-term growth while avoiding the risk of betting too much on a single wager.
Here’s the formula:
f= (bp - q) / b
Where:
- F = the fraction of your bankroll to bet
- b = the net odds (decimal odds – 1)
- p = the probability of winning
q = the probability of losing (1 - p)
Let's look at an example:
Suppose you’re betting at 2:1 odds (decimal 3.0). For every $1 you stake, you win $2 if correct. You believe your chance of winning is 60% (p = 0.6), which means your chance of losing is 40% (q = 0.4).
Using the Kelly formula:
F = (bp - q) / b
= ((2 × 0.6) - 0.4) / 2
= (1.2 - 0.4) / 2
= 0.8 / 2
= 0.4
This means the Kelly Criterion recommends using 40% of your bankroll on this bet.
Basically, this staking system helps you find the right balance for steady, long-term growth. If you bet too little, you won’t grow your money steadily. Bet too much, and you risk losing it all.
Types of Kelly Criterion
Full Kelly
This is the original formula, where you bet the exact amount the Kelly Criterion suggests based on your odds and chances of winning. However, full Kelly can be risky because it may recommend betting a large part of your bankroll, especially if you're very confident in your bet.
Fractional Kelly
This is when you use a smaller portion of the full Kelly to lower risk. So, instead of betting the full amount, you bet a smaller percentage, like half Kelly (0.5 Kelly) or quarter Kelly (0.25 Kelly). With this, you reduce the chance of big losses, especially in the short term, while still aiming for steady growth.
When to use the Kelly Criterion
Use the Kelly Criterion when:
- You can estimate probabilities reliably: Kelly assumes you know your true edge. If you’re confident in your calculations, the formula helps you size bets accurately.
- You want long-term bankroll growth: If your goal is steady, long-term growth, the Kelly staking system helps you maximize your bankroll over time without risking it all on a single bet.
You’re managing a large bankroll: If you have a decent bankroll, the formula adjusts bet sizes based on your current funds, ensuring you’re betting responsibly, while still aiming to grow your money.
Tips for using the Kelly criterion for smarter betting
- Be realistic about your probability estimates: To get the best results, make sure your probability estimates are based on solid research and data.
- Start small and test the waters: If you're new to the Kelly Criterion, begin with smaller bets. This allows you to understand the formula and adjust your strategy without risking too much.
- Use fractional Kelly for reduced risk: If the full Kelly bet size feels too risky, consider using a fractional Kelly approach to reduce risk while still aiming for growth.
- Stick to a long-term approach: The Kelly Criterion is meant for steady, long-term growth. Focus on gradual progress rather than trying for quick wins, even if you face losses in the short term.
- Track your results and adjust: Keep a record of your bets and their outcomes. This helps refine your probability estimates and fine-tune your strategy over time.
Conclusion
The Kelly criterion is a powerful bankroll management tool that can guide smarter bet sizing and support long-term growth. Its success depends on accurate probability estimates, disciplined tracking, and a commitment to the long view. Used carefully, it helps bettors strike the right balance between protecting their bankroll and maximizing returns over time.
Frequently asked questions
What are the risks of using the Kelly Criterion in the short term?
It’s built for long-term growth, not quick wins. In the short term, swings can be large, especially if your probability estimates are off.
Does the Kelly Criterion apply to all betting situations, like parlays or multi-bets?
Yes, but it’s more complex. You’d need to calculate the combined odds and overall probability, which is harder to do accurately. It’s simpler and usually more effective with single bets.
What is the difference between "betting to win" and "betting to risk" when using the Kelly Criterion?
"Betting to win" focuses on the amount you want to win based on your desired returns, while "betting to risk" focuses on the amount you're willing to risk in relation to your bankroll. The Kelly betting strategy is generally based on betting to win.
How do I handle situations where my bankroll is small, and the Kelly Criterion suggests betting a large percentage?
When your bankroll is limited, full Kelly can feel aggressive. Many bettors use fractional Kelly (like half or quarter) to reduce volatility and avoid overcommitting.
How do I adjust the Kelly Criterion if the odds change during the course of a game or event?
If the odds change during an event, you can recalculate the Kelly bet size based on the new odds and updated probability. However, constant recalculating during the event may not always be practical, so it's important to estimate odds and probabilities fairly before placing your bet. See our guide on live betting and best practices.