Kelly Criterion Betting Bankroll Management Strategy
There are many theories and ways to manage our betting bankroll. The range of options is extensive–however, one of the approaches most used by bettors is the Kelly Criterion. Kelly's Criterion owes its name to its creator J.L. Kelly. He wrote an article in 1956 called "A new interpretation of the Information Rate". It was based on the work of Claude Shannon. The goal of this strategy is to maximize the growth of our betting bankroll. For that, this criterion looks for determining the adequate stake we should use in every bet. We can calculate the stakes by using this formula:
Stake (in% of bankroll) = [[Odd x (Estimated probability / 100) -1] / (Odd -1)] x 100
This method expresses the stake to use as a bankroll percentage. At first glance, it can seem quite complex to assimilate. But, in practice, it is more straightforward than it looks. As we can see in this formula, the stakes of use depend on two factors. These are the odd and the occurring probability we estimate for the event on which we are going to bet.
Thus, to earn money using this bankroll management strategy, you must have in mind that:
- We must estimate as accurately as possible the events' probabilities we analyze. To do this, all aspects that may influence the game must be evaluated. For example, recent team sporting form, player injuries, if you play away or home, etc.
- You must find value in your bets. So, we must find the approximate probability the bookie has determined for the event. To do this, you have to invert the odd figure. This probability value must be compared with the probability we have estimated for the same event. If the occurring likelihood estimated by us is greater than that estimated by the bookie, we will have a value bet.
How To Use The Kelly Criterion Formula
Let's see how we can apply the Kelly Criterion formula through an example. Suppose we want to bet on a Manchester United and Arsenal match. We'll suppose that the victory odds for this match are distributed as 40% for Manchester United, 30% for a draw, and 30% for Arsenal. The odds would be: 2.60 for the Red Devils win, 3.60 for the draw, and 3.10 for the Gunners win. If we want to bet that Manchester will win, we can apply Kelly's formula to find out how much to bet in the following way:
{[2.60 x (40/100) -1] / (2.60-1)} x 100 = 2.50%
In this case, 2.50% would be the bankroll percentage that we should apply to this bet. Yet, we must consider that if our estimates probabilities are not correct, our bankroll will have a negative trend in the long term. In this bankroll management strategy, each bet is treated differently, depending on its value and the occurring probability of each event. Furthermore, the Kelly Criterion looks for maximizing the growth of our betting capital.
