The Kelly Criterion is not that likely to be discussed by punters in local betting shops, but it may just help some players boost profits and maximise returns. So what is the Kelly Criterion and how can gamblers take advantage when formulating their staking plans or betting systems?

The Kelly Criterion Explained

The Kelly CriterionThe Kelly Criterion, which is also referred to as the Kelly Formula or Kelly strategy, is a mathematical formula which, in it’s simplest form, is designed to calculate the optimal stake for a specific bet, based on the probabilities of success and potential returns. First published by J.L.Kelly Jr in 1956, it has often been amended or altered and applied to all manner of investments from sports betting to stock market investment.

The formula takes in a number of parameters, and ultimately delivers a percentage. This percentage is the portion of any investment fund (or betting tank) that should be invested in the bet. When the expected returns are greatest, the percentage to be invested will be largest.

Applying the Criterion

The key to applying the Kelly Criterion to a sports betting operation, is absolute confidence in handicapping, or pricing up outcomes. If the probabilities of success which are used in the formula are incorrect, then the result will be too.

There are further problems for gamblers to overcome. The percentage result of the formula is often significant, and large chunks of the betting tank can be required for individual bets. Most professional sports traders will not risk more than 2% of their betting funds on one selection – the Kelly Criterion will rarely suggest amounts that low.

Kelly FormulaFor these reasons, it is not a great idea to apply the Kelly Criterion in it’s absolute form. It can however, be applied in principal, to any staking plan. The criteria ultimately suggests staking more when the expected value is highest. Punters should not need an elaborate formula to apply that statement in a basic fashion. Assuming the chances of a particular outcome have been calculated, then a quick table can be created, with a staggered staking plan based on the expected value, for example, if the average stake used is normally £100, the following may introduce some form of Kelly Criterion benefits:

Expected Value and Stake
1-3% £80
4-5% £90
6-8% £100
9-10% £110
11-13% £120
14%+ £130

This table ensures that as the expected value of a bet rises, so does the stake, effectively applying many of the principals of the Kelly Criterion. Note this is based on expected value – it is not a ‘confidence’ rating of each selection – it is a cold, calculated number based on betting value.

Players applying such staking plans need the confidence to ensure the expected value is calculated without the issue becoming clouded to losses of form or complacency during winning streaks. If punters find themselves generally reducing stakes during bad runs, and increasing them when things are going well, the system may prove counter productive over the long term. Going back and checking betting records is a quick way to see if this is happening.

Staking plans are not for everyone, but those who use them should consider applying some level of the Kelly Criterion to their staking. Investing more when the ‘edge’ is greatest has clear and obvious benefits, but the calculations beforehand must be accurate, and the user also needs unemotional discipline when pricing up tissue markets.