The Kelly Criterion is essentially a staking strategy that helps determine the optimum amount to wager for maximum returns. The Kelly Criterion staking betting algorithm/strategy has been around since 1956 when John .L. Kelly Jr. first created it. However, it only entered mainstream application in investment and betting during the 2000s.
As a betting plan, the Kelly Criterion enjoys the reputation of ensuring the best returns in the long run. However, the formula naturally faces criticism in some areas too. Discover how this strategy works and how you can leverage it in your betting strategies.
Where does the Kelly Criterion Apply?
Placing bets in hopes of profitable returns is not a new practice in sports. And in most cases, the basic decisions remain the same.
For instance, who and what to bet your money on is a good starting point. So, if you consider a soccer league, choosing a preferred club and what results or predictions you foresee can answer these initial questions.
The next set of questions may include when to place bets and where to do it. Here, the time of betting may be a specified time during the season. For example, the playoffs may serve as the preferred answer to the question, ‘When to place bets?’ Also, your preferred choice of platform, app, or program may serve as the channel where you’re placing your bets.
However, none of these rudimentary questions can accurately answer how much money you should bet. Most people rely on their intuition for this question. And in many cases, your intuition may prove misleading. That’s where the Kelly Criterion steps in.
Using the already available information and estimations, the Kelly Criterion uses a specified formula to decide what amount you should bet.
How the Kelly Criterion Staking Betting Algorithm Works
As a set of algorithms, the Kelly Criterion is not confined to any industry or pursuit. So, you can apply the formula in any betting and staking scenario. The assistance in finding out what amount to invest is what sets it apart from other strategies.
As an algorithm, the Kelly Criterion works by putting specific values of the bet into work. To understand this process better, let’s take an example situation into consideration.
The Kelly Criterion Algorithm
Let’s imagine that you’re set to place bets on a soccer match that is set to take place. Here, you may learn that the soccer club you picked comes with odds measuring 3.50. And your own estimate of a successful outcome is set at 30%. The formula used to determine the final value here is as follows:
[(Probability x Odds) – 1] Divided by (Odds – 1)
So, if we were to insert the values determined in the initial assessment, the problem would look something like:
= [(0.3 x 3.50) – 1] ÷ (3.50 – 1)
= [(0.3 x 3.50) – 1] ÷ (2.5)
= [1.05 – 1] ÷ 2.5
=0.05 ÷ 2.5
= 0.02
Given the structure of the formula, 0.02 is the indication of how much one should bet on the soccer team to ensure the maximum returns over a period. Here, you can understand 0.02 as 2% of your betting bank. So, if your total bankroll for this category of betting is $2000, the right amount to bet here would be $40.
The Kelly Criterion Fractional Algorithm
The Kelly Criterion staking betting algorithm requires you to make honest estimations of what you think your edge is in a match. The problem here is that, as flawed humans, we may often overestimate our chances of winning, which leads to more reckless betting and higher-than-necessary wager amounts.
To offset this risk, you can go for a smaller fraction of the original edge you estimated. The formula then changes to:
[(Probability x Odds) – 1] Divided by (Odds – 1) x Desired fraction
For instance, let’s assume a ½ (half) fraction in our previous example. The algorithm then slightly changes to include the added fraction at the end.
= [(0.3 x 3.50) – 1] ÷ (3.50 – 1) x 0.50
= [{(0.3 x 3.50) – 1} ÷ 2.50] x 0.50
= {(1.05 – 1) ÷ 2.50} x 0.50
= (0.05 ÷ 2.50) x 0.50
= 0.02 x 0.50
= 0.01
As you can see, the recommended betting percentage decreases from 2% in the initial formula to 1% in this variation. So, a betting bank of about $2,000 would now warrant a bet of $20 on your chosen betting area for the best chances of maximizing returns.
This ‘halving’ makes your approach more balanced and moderate. Argued as a more sensible approach to wagering your bets, this fractional approach is recommended as the more preferred mode of the Kelly Criterion.
Used wisely, this approach can serve as the backbone of any NHL, NBA, NFL, or golf betting algorithms and software.
Drawbacks of the Kelly Criterion Algorithm
The first and obvious limitation to the Kelly Criterion is that the betting/staking algorithm only works successfully when the bet is made multiple times with no change in the probability of winning or losing and the rewards remaining constant. As we all know, this uniformity is rarely seen in reality when stakes, odds, and the payout percentage may exhibit variations within the same match.
Also, the accuracy of the algorithm depends on your own estimation of the odds. Without appropriate experience and information, you run the risk of making incorrect assumptions and calculations.
Finally, the Kelly Criterion requires you to have a minimum level of edge in your favor. So, if your edge is negative or even zero, the algorithm will advise against placing any bets.
However, the good news here is that you can maneuver around all these roadblocks with the right tools and programs that collect, assess, and study the betting information on your behalf.
Utilizing Kelly Criterion
Despite a few criticisms, the Kelly Criterion staking betting algorithm remains among the most reliable and profit-oriented strategies in betting.
To ensure that you navigate the pitfalls, use reliable algorithms that provide everything from Line Reversal tools and Playoff Simulators to Score Predictors and Power Ranking programs. These tools use advanced algorithms to provide the right data and analysis that assist you in formulating more accurate estimations of odds and edge.
Stay ahead of the betting curve when you use the right tools to ensure that your Kelly Criterion strategy remains sound, reliable, and highly profitable.