How To Use The Kelly Criterion In Sports Betting
The Kelly Criterion is a formula used in sports betting to decide how much of your bankroll to bet on a single wager. It’s not about picking winners, it’s about managing your money properly when you do find an edge.
The goal is to use some simple math to maximize long-term growth while minimizing the risk of going broke. This tactic has been used in both investing and gambling strategies since John Kelly developed it in the 1950s. It is especially useful in sports betting, where odds and probabilities are always shifting.
In this guide, we’ll break down how the formula works, when to use it, and the common mistakes to avoid if you choose to employ this strategy.
The Kelly Criterion Formula In Sports Betting Explained
The Kelly Criterion isn’t magic; it’s a simple formula that’s been utilized to make informed betting and investment decisions for over 70 years. The best part? Since the math is relatively straightforward, just about anyone can use it.
To employ this bankroll strategy, you only need the odds of an event, accurate probability estimates, and a little bit of discipline when placing your bets. Here’s how it works:
The Formula
The Kelly Criterion betting formula is (XP-Q)/X = F
- X = The odds of your wager converted into a decimal format (decimal odds).
- P = The probability of success as a percentage converted into a decimal.
- Q = The probability of losing as a percentage converted into a decimal.
- F = The solution to the formula, which is a percentage displayed as a decimal.
Variable X: Calculating the Decimal Odds from American odds
Let’s say you want to wager on a bet that is +150 in moneyline odds. To use the Kelly Criterion formula, you need to convert the “American odds” to decimal odds.
The formula for the conversion is X = (American odds/100)+1. Applying it to the wager above, you have 150/100 = 1.5, and when you add 1, you get 2.5. So, X = 2.5
Variable P: Calculating The Implied Probability of Winning
Now that you know the decimal odds for a bet, how do you calculate the probability of success and failure? Surprise, surprise, there’s some basic math for that, too. That’s because sports wagers have an implied probability that you can quickly figure out once you have the decimal odds. This number considers both the book makers’ vig and the odds of the line.
The formula for the implied probability of winning as a decimal is P = 1/Decimal Odds (to convert that to a percentage, you could multiply by 100, but for the Kelly Criterion variables, we want the number in decimal format). Applying that to the wager above, you have 1/2.5 = 0.4. So, P = 0.4
Variable Q: Calculating The Probability of Losing
The probability of losing is simply the opposite of the chance to win. Think about it like this; if you have a 40% chance of winning, then you have a 60% chance of losing.
The formula for the implied probability of losing as a decimal is Q = 1-P. Sticking with the same example from above, 1-0.4 = 0.6. So, Q = 0.6.
Putting it All Together
Alright, we have all of the variables from our example sports bet figured out, and we’re ready to enter them into the Kelly Criterion formula.
- X = 2.5
- P = 0.4
- Q = 0.6
When you insert all the numbers into the formula, it looks like this [(2.5*0.4)–0.6]/2.50 = F, but let’s break it into smaller parts to make it even easier.
- First, you multiply X by P. 2.5*0.4 = 1
- Next, you subtract Q from your answer. 1-0.6 = 0.4
- Finally, you divide that answer by X. 0.4/2.5 = 0.16
- So, F = 0.16 or 16%
In this example, the Kelly Criterion formula determines that you should wager 16% of your bankroll on this wager to obtain optimal value.
The formula is most useful once you start comparing bets with different odds and putting together several plays at once. That’s when you’ll see the weight of each wager in regard to the odds really shine.
Pros and Cons of Using the Kelly Criterion Formula
The Kelly Criterion is a great tool for managing your bankroll, but it’s not perfect. It can also take some time to get used to wagering that much on a single bet.
While it can help maximize profits and reduce risk, this formula comes with its own challenges. Here are the key pros and cons:
Pros
- Maximizes Long-Term Growth: The formula is designed to grow your bankroll efficiently over time.
- Prevents Over-Betting: It sets clear limits, reducing the chance of risking too much on a single bet.
- Balances Risk and Reward: It strikes a balance between aggressive betting and protecting your bankroll.
- Works with an Edge: When you have a real advantage, the Kelly Criterion helps you capitalize on it.
- Logical and Structured: It removes emotion from bet sizing, relying on math instead of gut feelings.
Cons
- Requires Accurate Probability Estimates: If your win probability is wrong, the formula loses its value.
- High Variance on Big Edges: The formula can suggest large bets when it detects a strong edge, increasing short-term risk.
- Complex for Beginners: The math might seem intimidating for those new to bankroll management.
- Doesn’t Account for Betting Limits: Sportsbooks often have maximum bet sizes, which can limit the formula’s effectiveness.
- Assumes Infinite Bankroll: Losing streaks can still hurt if your bankroll isn’t large enough to absorb them.
Expert Tip: Reduce Variance With Fractional Kelly Adjustments
The standard Kelly Criterion formula often calls for wagers that exceed 10% or more of your bankroll. That is a lot, considering most bankroll management best practices suggest a maximum of 1-5%.
One bankroll-friendly strategy that keeps the spirit of the Kelly Criterion formula while reducing overall bet size is to make fractional adjustments. Cutting the formula’s suggested wager in half will reduce variance and help bettors who have overestimated their advantage in a particular market.
And fractional Kelly betting doesn’t have to be ½ of the calculation. If it feels safer to you, opt for ⅓ of the recommended bet or even less. It depends on the level of risk you’re willing to endure and how accurate you think your calculations are. The important thing to remember is that you apply the same fractional adjustment across the board.
Long-Term Success Starts with Smart Bet Sizing
The Kelly Criterion isn’t about guaranteeing wins; it’s a strategy for managing your bankroll by using math to place larger wagers on plays where you have an edge.
While some bettors swear by this “magic formula,” it’s an aggressive strategy that beginners and intermediate bettors shouldn’t take lightly. The formula relies on accurate probability estimates, and overconfidence in your edge can backfire. That’s why discipline and realistic expectations are just as important as the math itself.
If you’re planning on using this sports betting strategy to manage your bankroll, tread lightly. Start with one-quarter of the formula to be safe and see how comfortable you feel with those numbers before slowly moving up to the full Kelly Criterion suggestion.
