How much should you bet when the odds are in your favour and you’ve found what you perceive to be value? That’s exactly where the Kelly Criterion method of staking or bankroll management comes into play.
Many pro-bettors around the world recommend the use of the Kelly Criterion or a modified version of it.
Bettors, particularly those betting on events with high levels of variance like Horse Racing tend to lean to the cautious side and divide the amount the criterion suggests by three or four up to 20 or 25 depending on swings.
Betting the full Kelly Criterion suggested amount requires one to be very confident in their assessed price or implied probability of each event occuring and or the bettor needs to be betting into a simple, non volatile market with limited betting options and low odds.
In essence, the Kelly Criterion calculates the proportion of your own funds to bet on an outcome whose odds are higher than expected.
What is the Kelly Criterion formula?
The basic Kelly Criterion formula is: (bp-q)/b
B = the Decimal odds -1
P = the probability of success
Q = the probability of failure (i.e. 1-p)
Using a coin as an example of Kelly Criterion staking
For example, consider you are betting on Hawthorn to beat Geelong in the AFL Grand Final at odds of 2.00.
However, the bettor has assessed the true odds of Hawthorn winning the Grand Final to be $1.90 which is implying a percentage chance of victory at 52.63%.
So,
P= 0.52
Q = 1-0.5263 = 0.4737
B = 2-1 = 1.
This works out at: (0.52×1 – 0.4737) / 1 = 0.0463
Therefore the Kelly Criterion would recommend you bet 4.63% of your bank.
Variance and the Kelly Criterion
This is a key factor all punters must understand when betting to maximize their edge…variance.
The graphics below detail the difference in variance for bets placed. The image on the bottom left represents the variance of 50 bets whereas the image on the right details the variance after 200 bets placed.
