The Kelly criterion
The Kelly criterion: what is it?
The Kelly criterion allows you to determine the optimal bet according to the odds of the bet and to your prediction. Betting more implies a useless risk and betting less generates a smaller profit.
The optimal bet is expressed as a percentage of the total amount you dedicate to sports betting.
How to calculate your bets with the Kelly criterion?
In order to calculate your bet, you need to know the odds offered by the bookmaker (O) and to have determined precisely the probability for your prediction to be right (P). The formula is then:
Bet as % of your betting portfolio = (O * P-1) / (O-1)
Example of how to calculate the Kelly criterion
Football match PSG-Chelsea
Your betting portfolio is £100. The odds are the following:
- PSG: 1.6
- Chelsea: 2.3
You are using a reliable statistics system and estimate that PSG has a 50% chance to win the match. The odds of 2.3 are overestimated and constitute a value bet.
The Kelly criterion allows you to calculate the optimal bet:
Kelly % = (2.3 * 50%-1) / (2.3-1) = 11.5%
You must then bet 11.5% of your portfolio, i.e. £11,5 (11.5% * £100).
Warning! The system will be profitable only if you calculate a probability that is more accurate than the one determined by the bookmaker! If your estimates are wrong, the strategy can become a loss booster.
Kelly criterion: our tips
Limit the maximum bets so that you do not risk huge losses. Set an upper limit to your bets (for example, 1 to 5 percent of your portfolio) or multiply the percentages given be the Kelly criterion by a coefficient ranging between 0 and 0.5.
Be extremely disciplined. Even if your convictions push you to bet more, you need to limit yourself to the bets calculated by the system. The Kelly criterion is fruitful on the long term!
Always keep in mind that the Kelly criterion is interesting only if you anticipate the event's result better than the bookmakers!