What Is the Kelly Criterion
June 15, 2023

When placing a sports bet, you do so with the hope and expectation that you’ll win. Maybe your pick will perform as expected, or you just feel good about the outcome. Regardless, one formula you can use removes the guesswork for you: the Kelly Criterion.

Devised by a computer scientist named John L. Kelly, Jr., the Kelly Criterion is a simple mathematical formula that helps determine how much to bet on a particular stake. The formula considers the odds and the probabilities of winning and losing.

If that sounds complicated, don’t worry – we’re here to simplify this concept so you can use it the next time you place a bet.

## History of the Kelly Criterion

John L. Kelly, Jr. was a computer scientist who worked at Bell Labs. In 1956, with the help of fellow Bell Labs researcher Claude Shannon, Kelly published a paper that contained the equation for the Kelly Criterion. The formula aimed to find the right amount to bet based on the odds and probabilities.

Although the Kelly Criterion is being hailed as an essential investment strategy today, it was originally made for betting. Claude Shannon and his wife tested this in Blackjack and Roulette in Las Vegas and found that the Criterion worked. These results were published in the book Fortunes Formula. Shannon subsequently used this method for investing and achieved the same results.

## How to use the Kelly Criterion in sports betting

Nowadays, the Kelly Criterion remains a popular method of determining a safe bet. Kelly’s paper from 1956 contains advanced equations that prove the formula’s efficacy, but here’s a simple version that everyone can use:

F = (bp – q) / b

And here’s how to interpret the formula:

• F = how much of your bankroll you should wager
• b = decimal odds – 1
• p = winning probability
• q = losing probability; subtract p from 1.

Bookkeepers give that information to you as you browse for something to bet, so all you need to do is plug those numbers into the formula, and you’ll get your optimal betting amount. Anything positive gives you the go-ahead to bet using that percentage of your bankroll, while a result of zero or negative means you shouldn’t place a bet.

And if that sounds tedious, especially if you have your eye on various betting lines, there are free websites online that can do the calculations for you.

### Example use

Let’s put the Kelly Criterion into practice. Say you want to place a very early bet on whether the Denver Nuggets will retake the NBA Championship in 2024. Some bookmakers place their odds at 6.5 with a winning probability of 15 percent. That makes the losing probability at 85 percent. Let’s use the Kelly Criterion to determine how much of your money you should bet:

b = 6.5 – 1 = 5.5

p = 0.15

q = 1 – 0.15 = 0.85

F = (bp – q) / b

F = ((5.5 * 0.15) – 0.85) / 5.5

F = (0.825 – 0.85) / 5.5

F = -0.025 / 5.5

F = -0.004

Because the Criterion gave a negative result, that’s your sign to not place any bets on the Nuggets for next year’s NBA Finals.

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