Kelly Criterion Betting Term Meaning
The Kelly Criterion, also known as the Kelly Bet, is a mathematical formula that determines the stake of a bet should be proportional to your perceived edge.
Knowledge of the Kelly Criterion is recommended because it provides punters with a solid formula to work out how much of their bankroll to risk on a bet. The Kelly Criterion Formula is relatively simple once you understand it:
The formula:(BP - Q) / B
- B = Decimal odds -1
- P = probability of success
- Q = probability of failure (i.e. 1-p)
The mathematical equation has been proven time and time again to be correct; however, the main issue with using the Kelly Criterion is that the punter has to estimate the probability of success (in their own opinion). If your probability of success percentage is not accurate, then you will not have long-term success using this staking method.
Using the Kelly Criterion for Betting
To see the Kelly Bet in action, let’s run through a real-life example. This is the betting (odds taken from bet365) for the outright win market on the Men’s Singles at Wimbledon.
After winning the French Open, we are going to take a punt on Rafa Nadal to lift the Wimbledon trophy once again. We have evaluated the form of the players and reviewed the draw.
The probability of success, in our opinion, is 25%. This is because Rafa could face Novak in the semis and then Federer in the final. Based on that assumption, these are the numbers we need:
- B = 6.50 -1 = 5.50
- P = 25% = 0.25
- Q = 75% = 0.75
(5.50 x 0.25 - 0.75) = 0.625 ÷ 5.50 = 0.113 (x100) = 11.30%
You must end up with a positive number. Our example shows 0.113 which when multiplied by 100 gives us the percentage of our bankroll we should wager on this bet (11.3%).
There is no disputing that the Kelly Criterion is one of the best staking strategies around when used properly. You have to give maximum thought to the success probability because the effectiveness of this system relies on the information being correct.
Before diving in, try the formula out on some pretend bets and when you do start using it, only bet small stakes to begin with while you fine-tune your probabilities.