A mathematical formula developed by physicist J.L Kelly Jr in 1956, the Kelly Criterion is a progressive betting system that informs you of how much of your bankroll you should bet in order to maximize the growth possibility of your bankroll in the long term. In other words, it is a strategy where the punter risks more if there is a greater chance of winning and consequently bets less if the chances of winning are low. The formula that is applied in this system is:
f = (bp – q)/b
f: is the part of present bankroll to be bet
b: the ratio between profit and risk on a bet after a win
p: probability of the bet being a winner
q: probability of the bet being lost
When calculated if the bet size shows 0 or in the negative, not accepting the bet would be a wise decision.
Let us consider an example. A range of bets is presented to us and we believe that these bets have a 50% probability of winning. However, these bets are available at +200, which means we have a 1-1 chance of winning and the odds are set at 2-1 for a payout. This is quite a tempting offer! So how much of your bankroll should you bet on this offer? According to the Kelly system,
f = [(2) (.5) - .5]/2
= [1 - .5]/2
= .25 or 25%
This calculates to 25%. So what Kelly suggests is that you should bet no more than 25% of your bankroll on the bets.
Accordingly, we bet $25 of our bankroll and we win. Now we have $50 added to our bankroll from the winnings plus $25 from the original bet taking our bankroll to $150. If we again bet 25% of the bankroll, which would be $37.50 on the next bet and we win, we will be able to add $112.50 to our bankroll taking it to a total of $225. However, if our prediction turns out to be wrong and we lose the second bet, our bankroll will reduce to $37.5.
However, the Kelly Criterion is an unpredictable betting system that can cause huge damage to your bankroll while displaying poor money management. Since it tells you to bet more with shorter odds, you could be betting anywhere from 20% to 50% of your bankroll on a single bet, which is not sound money management at all. All the more reason if these short odds are taken into the long run and you happen to lose.
Let us take the previous example once again. Seeing that the expectations from the bets are really high, you decide to bet 60% of your bankroll on a bet, which is $60 from your $100. You win and your bankroll goes up to $220. Now you again bet 60% of your bankroll or $132 on the second bet and you win again taking your bankroll to $484. You again wager 60% of your bankroll, which is 290.4 and you lose, your bankroll will be reduced to $193.6. This is a huge chance that we are taking with our bankroll by overbetting. It also shows our lack of money management strategies. So, if considered logically, the Kelly Criterion is not the safest and the best means of improving your bankroll.
The strategy is risky as outcomes may differ. If you wish to use the Kelly, it is advisable to use it with short-term small-sized bets, as the formula will ruin your bankroll if you use it to play large bets in the long run. Skilled handicappers will generally agree to this. Also one should consider the risk factor involved when using this system as mathematical calculations can be quite taxing. Although you can find online calculators that will help you calculate what portion of your bankroll to bet using the Kelly formula, you might falter in your calculations. If you make even a slight mistake in entering the numbers, you would get a different result and if you were to use this calculation to place a bet, you could be risking a huge amount of your bankroll in a bet that you believe in but turns out to be a loser.
Using the Kelly betting system could be psychologically exhausting too, as you are always trying to avoid the risk. So only bet that portion of your bankroll that you are comfortable risking in order to avoid stress. The strategy can generate high results in the long run, but since there are no lower or higher limits of stakes, one could end up betting a large amount of his bankroll in single bets. A single loss can clear out a large portion of your bankroll and therefore you need to be cautious. Since you cannot say for sure what your actual benefit in a sports bet will turn out to be, it is wise to stay away from overbetting.
Since the Kelly Criterion is not very effective in every situation, one should only attempt the system if they have a good knowledge of how the odds work as well as the sport they are planning to bet on. Most of those who use this betting system have known to miscalculate the probabilities and have overbet many a time. The strategy is certainly not advisable for beginners and novices, as a big loss to their bankroll might potentially damage their betting career for the lack of funds. Even those successfully using the Kelly system have not lived off this strategy alone, as the system presents risks that once done will take time to get you back on track once again.
Again like all betting systems, the Kelly requires discipline too. Discipline and sound money management are essentials of betting be it in sports, poker, casino or any other gambling activity for that matter. Wins will happen gradually and not by making large stakes in the hope of getting higher returns. This strategy does not work in gambling, so learn to be patent and bet wisely.
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