Kelly Criterion​

Content curated from and authored by Clear Data Sports

What if I told you there was a sports betting system that was endorsed by both Warren Buffett and Bill Gates? Sure, they aren’t exactly known for their world-class handicapping skills. And perhaps it isn’t the sports betting system that they endorse so much as it is the investment theory that the sports betting system is based on. But still, those are two guys probably worth listening to when it comes to making money.

The Kelly Criterion, also called the Kelly strategy or the Kelly bet, is that theory. And it may be worth your time to learn it.

What Is The Kelly Criterion?

To know the Kelly Criterion and understand its usefulness, you must understand the usefulness of bankroll management. So if you need to go back and re-read the section on bankroll management, do it now.

Developed by Bell Labs scientist John Kelly Jr. in the 1950s, the Kelly Criterion is a formula used to find the greatest value on the sports betting board, and then help determine exactly how many units you should be wagering. A unit being a fixed percentage of your bankroll.

The Kelly Criterion Formula is:

(BP-Q)/B

B = Decimal Odds - 1

P = Win Probability

Q = Loss Probability

Most explanations of The Kelly Criterion use a coin toss as an easy example to understand how this formula works, so let’s do that.

First, let’s remember that we’re using decimal odds here. A coin toss would be +100 in American odds, which makes it 2.00 in decimal odds. So B has the value of 1.

P and Q are easy enough, since a coin toss is 50/50. Both values are 0.50.

So the formula now reads (1x0.50 - .0.50)/1. That comes out to 0, which means you wouldn’t want to make this bet. But if we say that this particular coin has a 55 percent chance of landing on tails, the formula then becomes: (1x0.55 - 0.45)/1.

The answer now is 0.10, which means that if you are betting tails, the Kelly Criterion recommends that you wager 10 percent of your bankroll.

Zero or negative numbers, don’t make the bet. Anything in positive numbers, that is the recommended percentage of your bankroll to wager.

The Downside Of The Kelly Criterion

In the paper John Kelly wrote back in 1956, he himself said successful implementation of the Kelly Criterion requires the investment or game be played many times over. This is about the long-term probability of winning and losing.

Playing the roulette wheel, it’s easy. Those odds and probabilities never change. Sports, on the other hand, require an understanding of win probability and the ability to predict it in spite of its constantly changing environment. If you can do that, then the Kelly Criterion can be quite profitable in the long run.

In the end, this is just another way to identify bets that have value while managing your risk and keeping control of your bankroll. As long as you do those things, by whatever system you choose, you can be a success.