How to use Kelly Criterion in betting
• How can you benefit from using the Kelly Criterion
• A simple coin toss example to help you understand the Kelly criterion
Players should always look for a math-based advantage instead of following their impulse. For example, mathematical formulas for staking such as the Kelly criterion, could prove to be very helpful to them, as they provide a great tool for determining the amount of money to place on each bet.
Before placing any bets, there are six important questions to consider: who, what, when, where, why and how much? In this article we will deal with the last one, which is the amount of money we should place on every bet we choose to put money on.
A popular staking method that suggests each stake being proportional to the edge we think we have.
Think of placing a bet in the English Premier League. The questions above would seem like that:
Who will we bet on? Chelsea
What are we betting on? For its win
When are we placing the bet? Now
Where are we betting on? In X bookmaker that tends to offer the best odds
Why do we bet? Chelsea seems to have a better chance of winning
How much? How much money are we placing on this bet?
Most articles deal with the first five questions and usually use mathematical or statistical reasoning to answer the "why" question.
When making financial decisions, finding the right financial products is not enough, because the decision of how to divide your capital in them is crucial too. So, in betting an important question for the player is how much money to place on each bet or in other words, how to divide his capital through his betting options.
Many articles suggest using the Kelly criterion or some variant of it when it comes to staking methods. Basically, with the Kelly criterion we calculate what percentage of our capital we should wager on each value bet, in order to see our capital growing exponentially.
The Kelly Criterion formula is:
(BP - Q) / B
B = the decimal odds -1
P = the probability of winning
Q = the probability of loosing (1-P)
A coin toss example to understand the Kelly criterion
For example, suppose you bet on heads at 2.00. However, let’s say that the coin is biased and has a 52% chance for heads.
In this case:
P = 0.52
Q = 1-0.52 = 0.48
B = 2-1 = 1
This results in: (0.52 x 1 - 0.48) / 1 = 0.04
Therefore, the Kelly criterion would recommend that we bet 4% of our capital. Any positive percentage indicates an advantage in favour of our capital, therefore our capital will increase exponentially.
Finally, the Kelly criterion offers a clear advantage over other staking methods, as it involves less risk. However, it requires accuracy in predicting the probability of an outcome and we should also not expect a rapid increase in our capital, even if we follow the system with discipline.