One of the most popular methods for setting stake sizes for sports betting is called the Kelly Criterion. The Kelly Criterion bankroll management system is not only common, but it’s also one of the most effective ways for sports bettors to manage their money.
At first glance, the Kelly Criterion may seem complicated. But it is actually quite simple. Moreover, it is one of the smarter methods you can use to choose how much to risk on your bets. The Kelly Criterion bankroll management system is one of the most effective ways to maximize your upside while making sure you don’t go broke while betting.
In this post, you will learn what the Kelly Criterion bankroll management system is and how it works. We will take a look at the formula and a simple example. You will also find out what pitfalls to avoid when putting it into practice. By the time you finish this post, you will be ready to use the Kelly Criterion in your own sports betting and you will be a smarter gambler.
What is the Kelly Criterion bankroll management system?
The Kelly Criterion is a simple bet sizing formula, also called the Kelly bet or Kelly strategy. It tells you what percentage of your bankroll to stake based on:
- The probability of winning
- The probability of losing
- The decimal odds
You need to know all three of these in order to use the Kelly Criterion. In just a moment, we will show you how to input them into the formula to find out what percentage to stake.
The largest variable to concern yourself with when using the Kelly Criterion is the probability of winning. Learning how to accurately evaluate different matchups and determine a win probability is key to using the Kelly Criterion bankroll management system effectively.
History of the Kelly Criterion
The Kelly Criterion is named after the AT&T Bell Laboratories scientist who created it in 1956, John L. Kelly. The earliest applications of the Kelly Criterion were in horse racing. Since then, it has enjoyed widespread use among bettors and investors.
With sports betting spreading across the United States along with quickly changing laws, many new sports bettors are learning the basics of bankroll management. The natural progression is to eventually end up learning about the Kelly Criterion system, the most mathematically sound of all the different bankroll management options.
Kelly Criterion Formula
To understand the Kelly Criterion, you need to take a look at the mathematical formula that is used to calculate what percentage of your bankroll you should stake. Here is the formula:
K% = p – [q / b]
It can also be expressed like this:
K% = p – [(1-p) / b]
Here is the key that explains what p, q and b are in the Kelly Criterion formula:
p = probability of a win
q = probability of a loss (obtained via 1 – p)
b = decimal odds – 1
Kelly Criterion Example
To understand how this formula works, let’s consider the most basic example: a coin toss. The decimal odds for a coin toss are 2.00. So, “b” in this case is 2 – 1 = 1.
K% = p – [(1-p) / b]
K% = .50 – [(1-.50) / 1] = 0.00.
That means that the Kelly Criterion is telling you not to wager anything on a fair coin toss.
But what if the coin were weighted, and the true odds were no longer even? Imagine that the sportsbook still lists 2.00 decimal odds for this bet. But let’s say that the chances of it landing on heads are 54%, and the chances of it coming up tails are 46%. Now the numbers we plug into the formula change. Here is what you calculate if you are thinking of betting on heads:
K% = .54 – [(1-.54) / 1] = 0.08
The Kelly Criterion is now suggesting you wager 8% of your bankroll on heads.
Let’s say for some unfathomable reason, you decided you prefer to wager on tails. Here is what the formula would say:
K% = .46 – [(1-.46) / 1] = -0.08
Notice that the result of the formula is now a negative number. That means the Kelly Criterion is telling you that wagering on tails in this situation is a bad idea. You do not have an edge; the house has the edge.
You do not need to do all this math yourself each time you are setting your stakes. There are Kelly Criterion calculators out there that can take care of it for you. Just input your numbers and the calculator will tell you what to bet.
The most important part of the Kelly Criterion system is being able to assign a probability to your wager. For sports bettors, many will use a predictive model alongside the Kelly Criterion system to help them systemize that part of the equation.
Does the Kelly Criterion bankroll management system work?
The Kelly Criterion works better than a lot of other money management methods used by sports bettors. That said, it is far from perfect.
What the Kelly Criterion does best is give you an elegant way of quantifying the feasibility of a prospective bet.
- A positive number tells you that you have an edge, and the bet may be worth taking. The higher the number, the better your edge.
- A negative number tells you that the house has the edge, and you should not place the wager. The greater the negative number, the worse the edge is against you.
- If the number is 0, that means that the odds are even, and it is not worth taking the bet.
So, for assessing whether or not you should take a bet, the Kelly Criterion bankroll management system works great.
But does the Kelly Criterion work for sizing your stakes? To a degree, yes—but there is an important caveat.
We recommend that you avoid staking more than 5% of your account on any bet. In fact, we suggest that you keep the percentage you wager closer to 1-2%. This is in line with how the pros do it.
But here’s the thing—the Kelly Criterion is going to regularly tell you to bet more than 5%. Sometimes it is going to tell you to bet a lot more.
In fact, even in the example we gave involving the weighted coin toss, the Kelly Criterion recommended betting 8% of your account. That is simply too much. It does not take a huge losing streak to wipe out your account if you are setting stakes this high.
Let’s look at another example. Imagine a scenario where again the sportsbook quotes even odds. But now let’s say that you have a 60% chance of a win, and a 40% chance of a loss.
K% = .60 – [(1-.60) / 1] = 0.20
Now the Kelly Criterion is suggesting you bet 20% of your account. That is a full fifth of your entire bankroll.
But a 40% chance of losing is still significant. Yes, you have a nice edge, but it is far from a guarantee. You have a good chance of winning, but you also have an alarmingly high chance of losing a fifth of your bankroll on a single wager.
So, the Kelly Criterion works for stake sizing up to a point. You need to set an upper limit on what you are willing to risk. Do not exceed it just because the Kelly Criterion says you should.
Kelly Criterion bankroll management system pros and cons
Based on what we learned, let’s review the advantages and drawbacks of the Kelly Criterion for sports betting.
Pros
- The Kelly Criterion gives you clear, simple suggestions for whether or not to wager and how much to risk. These suggestions are based on mathematical logic.
- This money management system is superior to other strategies such as the Martingale that are based on faulty logic.
Cons
- The Kelly Criterion frequently tells bettors that they should wager unreasonably large percentages of their bankrolls.
Kelly Criterion best practices
As we mentioned before, it is wise to set an upper limit on your stake sizes, and then use the Kelly Criterion to set your stakes within that allowable range.
So, let’s say you set a maximum stake size of 5%. If the Kelly Criterion tells you to bet 2%, then bet 2%. If it tells you to bet 5%, then bet 5%. But if it tells you to bet 6%, bet 5%.
If the Kelly Criterion tells you not to bet at all, you should generally do as it suggests. It is presenting you with mathematical evidence that you do not have an edge. Logically, there is no reason to wager money in those situations.
Alternatives to the Kelly Criterion
You might be wondering how the Kelly Criterion compares to other sports betting money management systems.
Martingale bankroll management system
Many bettors use progressive betting systems. The most popular among these is the Martingale system. Under this strategy, you increase your risk with every loss in the hopes that you will be able to offset all of your losses once you finally win.
Martingale and similar progressive systems do not work. They require infinite bankrolls. While they seem intuitive, they are built on illogical premises such as the Gambler’s Fallacy. The Martingale betting strategy is not a strong one.
Flat unit bankroll management system
Another option is to use a flat unit size. This can be a dollar amount or a percentage. A percentage works much better since you can recalculate it each time you place a bet so that it scales as your account grows or shrinks.
While a flat unit size does not account for your chances of winning or the odds like the Kelly Criterion does, it is still one of the best methods for stake sizing. It promotes consistency and encourages a strict cap.
Final thoughts on the Kelly Criterion bankroll management system
The Kelly Criterion is one of the best options for analyzing whether or not you have an edge before placing a bet. It provides simple, straightforward, numerical recommendations. It can work well for stake sizing if you remember to place a firm limit on how much you are willing to wager.